Question

Westburne Company produces three products: Alpha, Omega, and Beta. Data (per unit) concerning the three products follow:

Alpha	Omega	Beta
Selling price	$160	$112	$140
Less variable expenses:
Direct materials	48	30	18
Labour and overhead	48	54	80
Total variable expenses	96	84	98
Contribution margin	$ 64	$ 28	$ 42
Contribution margin ratio	40%	25%	30%

Demand for the company’s products is very strong, with far more orders each month than the company can produce with the available raw materials. The same material is used in each product. The material costs $6 per kilogram, with a maximum of 10,000 kilograms available each month.

Required:

1. Which orders would you advise the company to accept first, those for Alpha, Omega, or Beta? Which orders second? Third?

CHECK FIGURE

The company should accept orders first for Beta, second for Alpha, and third for Omega.

Exercise 12-11 UTILIZATION OF A CONSTRAINED RESOURCE Contribution per unit of the constrained resource (materials) is: Alpha Omega Beta (a) Direct materials required per unit.. (b) Cost per kilogram ........ (C) Kilograms required per unit.......... (d) Contribution margin per unit ......... (e) Contribution margin per kilogram of materials used. Which orders would you recommend the company accept first, second, third? Why?

Answer 1

18 Requirement Utilization of Constrained Resource Particulars Alpha Omega Beta Direct Materials required per Unit $ 48 $ 30 $ Cost per Kilogram $ 6 $ 6 $ 6 Kilograms required per Unit 5 3 Contribution Margin per Unit $ 64 $ 28 $ 42 Contribution Margin per kilogram of Materials Used $ 8 $ 6 $ 14 8 A Conclusion : Since, Materials is a Constraint Resource, we will produce the products in the order of highest margin. So, the Company will produce the products in the order of Beta, Alpha and Omega.