Product $180 $270 $240 Selling price Less variable expense:s Direct materials Ot
ID: 2398532 • Letter: P
Question
Product $180 $270 $240 Selling price Less variable expense:s Direct materials Other variable expenses Total variable expenses Contribution margin 32 148 180 $60 102 126 90 162 $108 Contribution margin ratio 10702370 The same raw material is used in all three products. We have only 5,000 pounds of raw material on hand. The material costs $8 per pound. Demand for each product is 700 units per week. How many pounds of material would be required to satisfy demand for all three products? This is in total, not for just one unit. And the total for all three added together a. b. Compute the amount of contribution margin that will be obtained per pound of material used in each product. Which product would you recommend that the company work on next week first, second, and third? c. First Second Third d. Based on your decision in (c), what is the maximum contribution margin the company will make next week? A foreign supplier could furnish us with additional stocks of raw material at a substantial premium over the usual price. What would be the highest price we should be willing to pay for an additional pound of material? e.Explanation / Answer
a
Maximum requirement of Raw material
Product
A
B
C
Cost of Raw material (A)
$ 24.00
$ 72.00
$ 32.00
Cost of one pound of RM (B)
$ 8.00
$ 8.00
$ 8.00
Total Pounds required in on unit (C= A/B)
3
9
4
Maximum demand of product (in units) (D)
700
700
700
Total number of RM required (in Units) (E=C*D)
2100
6300
2800
Total Material required will be
11200
Pounds
b
Contribution Per Pound of Raw material calculation
Product
A
B
C
Contribution (A)
$ 54.00
$ 108.00
$ 60.00
Raw material quantity per unit (B)
3
9
4
Contribution per Pound of RM (A/B)
$ 18.00
$ 12.00
$ 15.00
c
Statement of Ranking
Product
A
B
C
Contribution Per Pound of Raw material
$ 18.00
$ 12.00
$ 15.00
Ranking
First
Third
Second
First
A
Second
C
Third
B
d
Calculation of Maximum units that can be produced with 5000 Pounds of RM
Statement of Optimum Product Mix
Product
Quantity of Product
RM required per Quantity of Product
A (rank 1)
700
3
2100.00
B ( Rank 3)
11.11*
9
100.00
C (Rank 2)
700
4
2800.00
Maximum Quantity
5000.00
* 11.11 will be produced but at the time of selling only 11 units will be sold .
Income Statement
Product
A(700 Units)
B (11 Units)
C (700 Units)
Total
Sales revenue
$ 126,000.00
$ 2,970.00
$ 168,000.00
$ 296,970.00
Less: variable Cost
Direct Material
$ 16,800.00
$ 792.00
$ 22,400.00
$ 39,992.00
Other Overhead Expenses
$ 71,400.00
$ 990.00
$ 103,600.00
$ 175,990.00
Contribution
$ 37,800.00
$ 1,188.00
$ 42,000.00
$ 80,988.00
Total Contribution next week
$ 80,988.00
E
Minimum price
Shortage in production of B
689
Units
Sale price of 689 units
$ 186,030.00
Less: Variable cost except material
$ 62,010.00
Contribution ( Before material Cost) (A)
$ 124,020.00
Total Raw material Needed (689*9) (B)
6201
Units
Maximum price (A/B)
20
per unit
Notes
a
Maximum requirement of Raw material
Product
A
B
C
Cost of Raw material (A)
$ 24.00
$ 72.00
$ 32.00
Cost of one pound of RM (B)
$ 8.00
$ 8.00
$ 8.00
Total Pounds required in on unit (C= A/B)
3
9
4
Maximum demand of product (in units) (D)
700
700
700
Total number of RM required (in Units) (E=C*D)
2100
6300
2800
Total Material required will be
11200
Pounds
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