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

Ans :

	A	B	C
Selling price (A)	88	72	78
Variable expense
Direct material(B)	26.4	18	9
other variable expenses©	26.4	36	45.6
Total variable expenses	52.8	54	54.6
Contribution margin (D)	35.2	18	23.4
Contribution margin ratio	40%	25%	30%
Direct material per unit in dollars (E )	3	3	3
Total Direct materials per unit (B/E) = F	8.8	6	3
1. Contribution margin per pound (F/D)	4	3	7.8
2. Ranking for selection	II	III	I
Maximum units (G)	900	900	900
Materials required for maximum units(G*F)	7920	5400	2700
Allocation of 6000 pounds (H)	0	3300	2700
Maximum units for allocation (H/F) = I	0	550	900
3. Total contribution (I*D)	0	9900	21060

Total contribution = $ 9,900 + $ 21,060

= $ 30,960