Question

Benoit Company produces three products—A, B, and C. Data concerning the three products follow (per unit): Product A B C Selling price $ 88.00 $ 72.00 $ 78.00 Variable expenses: Direct materials 26.40 18.00 9.00 Other variable expenses 26.40 36.00 45.60 Total variable expenses 52.80 54.00 54.60 Contribution margin $ 35.20 $ 18.00 $ 23.40 Contribution margin ratio 40 % 25 % 30 % The company estimates that it can sell 900 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 6,000 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 6,000 pounds of materials?

Answer 1

1) Contribution margin per pound

	A	B	C
Contribution margin per unit	35.20	18	23.40
Pound per unit	8.8	6	3
Contribution margin per pound	4	3	7.8

2) Rank

Product	Rank
A	Second
B	Third
C	First

3) Calculate maximum contribution margin

Product	Pound	Unit	Contribution margin
C	900*3 = 2700	900	900*23.40 = 21060
A	3300	3300/8.8 = 375	375*35.20 = 13200
B	0	0	0
Total	6000		34260

Maximum contribution margin = $34260