Question

Benoit Company produces three products—A, B, and C. Data concerning the three products follow (per unit):

	Product
	A				B				C
Selling price	$	80			$	56			$	70
Variable expenses:
Direct materials		24				15				9
Other variable expenses		24				27				40
Total variable expenses		48				42				49
Contribution margin	$	32			$	14			$	21
Contribution margin ratio		40	%			25	%			30	%

The company estimates that it can sell 800 units of each product per month. The same raw material is used in each product. The material costs $3 per pound with a maximum of 5,000 pounds available each month.

Required:

1. Calculate the contribution margin per pound of the constraining resource for each product.

2. Which orders would you advise the company to accept first, those for A, B, or C? Which orders second? Third?

3. What is the maximum contribution margin that the company can earn per month if it makes optimal use of its 5,000 pounds of materials?

Answer 1

Ans:

1. Calculate the contribution margin per pound of the constraining resource for each product.

	A	B	C
Contribution margin per unit	32.00	14.00	21.00
Pound per unit	8.00	5.00	3.00
Contribution margin per pound	4.00	2.80	7.00

2. Which orders would you advise the company to accept first, those for A, B, or C? Which orders second? Third?

Product	Rank
A	Third
B	Second
C	First

3. What is the maximum contribution margin that the company can earn per month if it makes optimal use of its 5,000 pounds of materials?

Total Pounds available	5000 pound
Product C (800*3)	2400
Product A (2600/8)	325 unit

Maximum contribution = (2400*7.0+325*32) = 27200