Question

Exercise 12-12 Volume Trade-Off Decisions [LO12-5]

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

	Product
	A				B				C
Selling price	$	85.00			$	60.00			$	82.00
Variable expenses:
Direct materials		27.20				15.00				8.00
Other variable expenses		27.20				33.00				53.50
Total variable expenses		54.40				48.00				61.50
Contribution margin	$	30.60			$	12.00			$	20.50
Contribution margin ratio		36	%			20	%			25	%

The company estimates that it can sell 850 units of each product per month. The same raw material is used in each product. The material costs $4 per pound with a maximum of 5,100 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 5,100 pounds of materials?

Answer 1

Benoit Company

1. Calculation of the contribution margin per pound of the constraining resource for each product i.e. raw material.

Particulars	A	B	C	Comments
Selling price ( Amt in $)	85	60	82
less: Total variable expenses ( Amt in $)	(54.4)	(48)	(61.5)
Contribution margin ( Amt in $) (I)	30.6	12	20.5
The raw material used per unit of product (in pounds) (II)	6.8 (27.2/4)	3.75 (15/4)	2 (8/4)	Calculated using = direct material cost/ cost per pound
Contribution per pound of raw material (I/II)	$ 4.5	$ 3.2	$ 10.25

2. I would advise the company to first accept the order of Product C having the highest contribution per pound of the raw material of $ 10.25, followed by product A having contribution per pound of the raw material of $ 4.5 and subsequently followed by product B having contribution per pound of the raw material of $ 3.2

3. maximum contribution margin that the company can earn per month if it makes optimal use of its 5,100 pounds of materials:

Product	No. of units	Contribution per unit (in $)	Total Contribution (in $)
A	500 (W N1)	30.6	15300
B	-	12	-
C	850 (W N1)	20.5	17425
Maximum contribution margin that the company can earn per month	$ 32725

(W N1)

Calculation of no. of units of each product to be manufactured:

Particulars	Preference	units of each product to be manufactured
A	2	500 units [ since raw material remaining after the product C is (5100-1700)= 3400 pounds. So max units of product A that can be manufactured is 3400 pounds RM /6.pound per unit]
B	3	-
C	1	850 units (Since contribution per pound of raw material is highest in case of product C and maximum units that can be sold is 850. So 850 units should be produced) Raw material utilized in producing C is 850 units x 2 pounds = 1700 pounds