3.
Product | |||
A | B | C | |
Direct Material cost per unit | $ 18.00 | $ 72.00 | $ 30.00 |
Material Cost per pound | $ 6.00 | $ 6.00 | $ 6.00 |
Pound of material per unit | 3 | 12 | 5 |
Estimated sales demand | 600 | 600 | 600 |
Material required (Pounds) | 1800 | 7200 | 3000 |
Contribution Margin Per unit | $ 36.00 | $ 72.00 | $ 50.00 |
Contribution Margin Per pound | $ 12.00 | $ 6.00 | $ 10.00 |
Rank | 1 | 3 | 2 |
Rank has been assigned on the basis of higher contribution
margin per pound of raw material.
Accordingly company will produce Product A first, then B and then
C
Company can produce A & C in full will given raw material of
5400 pounds but can produce only but can only utilise 600 pounds
i.e. (5400-1800-3000) for Product B
Therefore Maximum Contribution is
Product A = 1800 x $12 = $21600
Product B = 3000 x $10 = $30000
Product C = 600 x $6 = $ 3600
Total Contribution = $55200
4. As company has 600 units of demand for all products then
company should purchase from outside at the minimum rate as per the
lowest contribution margin per pound calculation.Product B has the
lowest contribution margin per pound. he contribution margin per
pound for Product B is $6 per pound . Therefore the maximum price
that the company should pay for materials is minimum contribution
margin per pound over present rate i.e $6 + $6 = $12
Moreover 5400 pounds of raw material is fulfiling demand for
Product A & product C, only required for Product B, Since
Contribution Margin per raw material pound is $6, if company
Purchases above $12, it will lead to losses
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