Question

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

	Product
	A				B				C
Selling price	$	80.00			$	66.00			$	72.00
Variable expenses:
Direct materials		24.00				16.50				12.00
Other variable expenses		24.00				33.00				38.40
Total variable expenses		48.00				49.50				50.40
Contribution margin	$	32.00			$	16.50			$	21.60
Contribution margin ratio		40	%			25	%			30	%

The company estimates that it can sell 700 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

1.

	A	B	C
Contribution margin per unit	$32	$16.5	$21.6
(/) Number of pounds of raw material per unit of product	8	5.5	4
Contribution margin per pound	$4	$3	$5.4

Note 1:

Number of pounds of raw material per unit of product:

	A	B	C
Direct material cost per unit	$24	$16.5	$12
(/) Cost per pound	$3	$3	$3
Number of pounds of raw material per unit of product	8	5.5	4

2.

I advise the company to accept the orders of product C first, product A second and then product B third. This is because of highest contribution margin per pound. C has highest contribution margin per pound so it is first.

3. Maximum contribution margin = $19000

Solution:

Statement showing maximum contribution margin:

	C	A	B	Total
Number of pounds of raw material per unit of product	4	8	5.5
(*) Number of pounds allocated	2800 [700*4]	2600 [5400-2800]	0
Contribution margin per pound	$4	$3	$5.4
Total contribution margin	$11200	$7800	$0	$19000

Note 2: Based on order, the first product will be allocated pounds required to produce maximum goods i.e. 700 units and pounds left over (if any) will be allocated to second and third products. So, product a got 2800 pounds [700 units * 4 pounds] and to produce maximum units of product B 5600 pounds are required, but there are only 2600 pounds left [5400-2800]. So product B got 2600 pounds. As there are no raw materials left for product C it got 0 pounds.