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				18.00				9.00
Other variable expenses		27.00				27.00				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 750 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 5,400 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 5,400 pounds of materials?

Answer 1

Required 1 :
Here, it is given that a maximum of 5400 pounds of direct materials is available each month, which means direct materials is the constraining resource.
	Product A	Product B	Product C
Direct materials cost per unit	27.00	18.00	9.00
(/) Direct materials cost per pound	3	3	3
Direct materials used per unit (pounds)	9.0	6.0	3.0
	Product A	Product B	Product C
Contribution margin per unit	36.00	15.00	24.00
(/) Direct materials used per unit	9.0	6.0	3.0
Contribution margin per pound of the constraining resource	4.00	2.50	8.00

Required 2 :
Product A	Second
Product B	Third
Product C	First

Required 3 :
It is given that Company can sell 750 units of each product per month
As per the given ranking in requirement 2, the company will first produce product C, then product A and then product B.
Total direct materials available	5400	pounds
Direct materials required to produce 750 units of product C = Direct materials used per unit * 750 = 3 * 750 =	2250	Pounds
Direct materials required to produce 750 units of product A = Direct materials required per unit * 750 = 9 * 750 =	6750	Pounds
As we can see that the company cannot produce 750 units of product A as it does not have that much of direct materials left after producing product C
Direct materials left after producing product C = 5400 - 2250 =	3150	Pounds
Units of Product A that can be produced = Direct materials left after producing product C / Direct materials required for per unit of Product A = 3150 / 9 =	350	units
So, to maximize the contribution margin company can produce 750 units of product C and 350 units of product A
Maximum Contribution margin = ( Units of Product C * Contribution margin per unit of Product C ) + ( Units of product A * Contribution margin per unit of product A ) = ( 750 * 24 ) + ( 350 * 36 ) =	30600