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			$	54.00			$	62.00
Variable expenses:
Direct materials		21.60				18.00				9.00
Other variable expenses		21.60				22.50				34.40
Total variable expenses		43.20				40.50				43.40
Contribution margin	$	28.80			$	13.50			$	18.60
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 4,800 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 4,800 pounds of materials?

Answer 1

1.

Calculate number of pounds of materials used per unit of each product as follows:

	Product A	Product B	Product C
Cost of direct material used per unit	21.60	18.00	9.00
Divide by: Material cost per pound	3.00	3.00	3.00
Number of pounds of material used per unit	7.20	6.00	3.00

Material is the constraining resource because a limited quantity (4,800 pounds) is available each month.

Now calculate contribution margin per pound of the constraining resource for each product.

	Product A	Product B	Product C
Contribution margin per unit	28.80	13.50	18.60
Divide by: Number of pounds of material used per unit	7.20	6.00	3.00
Contribution margin per pound of the constraining resource	4.00	2.25	6.20

2.

Contribution margin per pound of material is highest for Product C, so orders for this product should be accepted first.

Contribution margin per pound of material is second highest for Product A, so orders for this product should be accepted second.

Contribution margin per pound of material is lowest for Product B, so orders for this product should be accepted third.

3.

First 700 units of Product C should be produced.

Material consumed in production of 700 units of Product C = 700 x 3 = 2,100 pounds

Material available after manufacture of 700 units of Product C = 4,800 - 2,100 = 2,700 pounds

Remaining quantity of material should be used to produce Product A.

Number of units of Product A to be manufactured = 2,700/7.20 = 375

Therefore, 700 units of Product C and 375 units of Product A should be produced.

Maximum contribution margin that can be earned = (700 x $18.60) + (375 x $28.80) = $23,820