Question

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

	Product
	A				B				C
Selling price	$	72.00			$	60.00			$	62.00
Variable expenses:
Direct materials		21.60				18.00				9.00
Other variable expenses		21.60				27.00				34.40
Total variable expenses		43.20				45.00				43.40
Contribution margin	$	28.80			$	15.00			$	18.60
Contribution margin ratio		40	%			25	%			30	%

The company estimates that it can sell 1,000 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 6,600 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 6,600 pounds of materials?

Answer 1

Part A & B: Contribution margin per pound and ranking:

S No	Particulars	Product A	Product B	Product C
1	Direct Materials	$            21.60	$            18.00	$              9.00
2	Cost of Material per pound	$              3.00	$              3.00	$              3.00
3	Number of pounds of materials required [ 1 / 2 ]	7.20	6.00	3.00
4	Contribution	$            28.80	$            15.00	$            18.60
5	Contribution per material pound [ 4 / 3 ]	$              4.00	$              2.50	$              6.20
6	Rank	2	3	1

Part C: Maximum Contribution from Optimal Mix

Total Materials Required = ( 1000 * 7.20 ) + ( 1000 * 6.00 ) + ( 1000 * 300 )

= 7,200 + 6,000 + 3,000

= 16,200

Materials Available = 6,600

Hence, Material is the limiting factor.

Based of the contribution rankings, the materials will be firstly utilized for producing Product C, Product A and then Product B

Contribution from Product C = 1,000 * $ 18.60 = $ 18,600

Materials Available = 6,600 - 3,000 = 3,600

Number of units of Product A that can be produced = 3,600 / $ 7.20 = 500 units

Contribution from Product A = 500 * $ 28.80 = $ 14,400

Maximum Contribution due to optimal mix = $ 18,600 + $ 14,400

= $ 33,000