Benoit Company produces three products—A, B, and C. Data concerning the three pr

Question

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

Product

80.00

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 6,200 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 6,200 pounds of materials?

Product

A B C Selling price $

80.00

$ 57.00 $ 70.00 Variable expenses: Direct materials 24.00 15.00 12.00 Other variable expenses 24.00 27.75 37.00 Total variable expenses 48.00 42.75 49.00 Contribution margin $ 32.00 $ 14.25 $ 21.00 Contribution margin ratio 40 % 25 % 30 %

Explanation / Answer

1. Calculate the contribution margin per pound of the constraining resource for each product.

21

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 6,200 pounds of materials?

Product C = 750*4 = 3000 pound

Product A = (6200-3000)/8 = 400 units

Maximum contribution margin = (750*21+400*32) = 28550

Product A Product B Product C Contribution margin per unit 32 14.25

21

Pound per unit 8 5 4 Contribution margin per pound 4 2.85 5.25

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