Question

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

	Product
	A				B				C
Selling price	$	84.00			$	70.00			$	74.00
Variable expenses:
Direct materials		25.20				21.00				9.00
Other variable expenses		25.20				31.50				42.80
Total variable expenses		50.40				52.50				51.80
Contribution margin	$	33.60			$	17.50			$	22.20
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

	Product
	A	B	C
Cost of Raw material                                  (A)	$     25.20	$     21.00	$              9.00
Cost of one pound of RM                          (B)	$       3.00	$       3.00	$               3.00
Total Pounds required in on 1 unit          (C= A/B)	8.4	7	3

Requirement 1 and 2

Statement of ranking indicating which product to produced first, second and third
	Product
	A	B	C
Contribution margin per unit	$   33.60	$ 17.50	$ 22.20
Total Pounds required in on 1 unit	8.40	7	3
Contribution margin per Pound of Raw material	$ 4.00	$   2.50	$ 7.40
Ranking	II	III	I

Order of production

First-------C

Second----A

Third ------B

Requirement 3

Statement of Optimum mix
Product	Units to be Produced upto maximum demand or available quantity of raw material	Pounds per Unit	Pounds consumed
C (Rank I)	750	3	2250.00
A (Rank II)	375	8.40	3150.00
B (Rank III)	0	7	0.00
Maximum Quantity			5400.00

There will be zero production of B since no raw material is left for production of B.

Maximum contribution that can be earned
	Product C	Product A	Total
Contribution margin per unit	$ 22.20	$ 33.60
Units sold	750	375
Total contribution margin	$ 16,650.00	$ 12,600.00	$   29,250.00

Maximum contribution =$29250