Question

Exercise 12-12 Volume Trade-Off Decisions (L012-5] Benoit Company produces three products-A, B, and C. Data concerning the three products follow (per unit): A $75.00 Product B $64.00 C $66.00 Selling price Variable expenses: Direct materials Other variable expenses Total variable expenses Contribution margin Contribution margin ratio 22.50 22.50 45.00 $30.00 40% 15.00 33.00 48.00 $16.00 25% 12.00 34.20 46.20 $19.80 30% The company estimates that it can sell 900 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 5,400 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 5,400 pounds of materials?

Answer 1

	A	B	C	Total
Contribution margin per unit	$30.00	$16.00	$19.80
Direct materials used per unit(in pound)	7.50	5.00	4.00
Contribution margin per pound	$4.00	$3.20	$4.95
Ranking based on CM per pound	II	III	I
So company should accept the order of product C then A and then B
Maximum Demand(in units)	900	900	900
Materials used to meet maximum demand	6750	4500	3600
Materials actually used based on constraint of 5400 pounds	1800	0	3600	5400
Maximum Contribution margin	$54,000.00	$0.00	$71,280.00	$1,25,280.00