Question

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

	Product
	A				B				C
Selling price	$	90.00			$	60.00			$	80.00
Variable expenses:
Direct materials		27.00				15.00				9.00
Other variable expenses		27.00				30.00				47.00
Total variable expenses		54.00				45.00				56.00
Contribution margin	$	36.00			$	15.00			$	24.00
Contribution margin ratio		40	%			25	%			30	%

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 $3 per pound with a maximum of 5,700 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 5,700 pounds of materials?

Answer 1

• All working forms part of the answer
• Requirement 1

Working		A	B	C
A	Direct Materials per unit	$                   27.00	$                   15.00	$                        9.00
B	Material cost per pound	$                     3.00	$                     3.00	$                        3.00
C = A / B	Direct material pound per unit	$                     9.00	5	3
D	Contribution margin per unit	$                   36.00	$                   15.00	$                      24.00
E = D/C	Contribution margin per pound [Answer]	$                     4.00	$                     3.00	$                        8.00

• Requirement 2

Product with ‘highest’ contribution margin per unit of limited resources will be selected first.

Product A	SECOND
Product B	THIRD
Product C	FIRST

• Requirement 3

Working

	A	B	C
Maximum demands	850	850	850
Direct material pound per unit	9	5	3
Total Material requirement for fulfulling demand	7,650	4,250	2,550

	Total pounds Available	A	B	C	pounds Allocated
Total Material requirement for fulfulling demand		7,650	4,250	2,550
Pounds available	5,700
#1 Allocation to C				2,550	2,550
Pounds available	3,150
#2 Allocation to A		3,150
Pounds available	-
Total pounds of material allocated		3,150	-	2,550
Contribution margin per pound		$                     4.00	$                        3.00	$               8.00
Total Contribution margin		$          12,600.00	$                             -	$    20,400.00

Answer: Maximum Contribution margin that can be earned = 12600 + 20400 = $ 33,000