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

Question

Benoit Company produces three products, A, B, and C. Data concerning the three products follow (per unit) Product Selling price $ 85 $ 65 $ 75 Variable expenses Direct materials 25.50 19.50 5.25 Other variable expenses Total variable expenses Contribution margin Contribution margin ratio 25.50 51.00 $34.00 29.25 48.75 $16.25 47.25 52.50 $22.50 40% 25% 30% Demand for the company's products is very strong, with far more orders each month than the company can produce with the available raw materials. The same material is used in each product. The material costs $6 per pound with a maximum of 4,500 pounds available each month Required: a. Compute contribution margin per pound of materials used. (Round your intermediate calculations and final answers to 2 decimal places.) Contribution Margin per Pound Product A Product EB Product C

Explanation / Answer

Answer: a)

Calculation of Contribution Margin per pound of materials used:

Answer: b)

As computed above, the company should accept orders first for Product C, second for Product A, and third for Product B.

Because Product C uses the least amount of material per unit of three products, and because it is the most profitable of the three in terms of its use of materials, some students wil immediately assume that this is an infallible relationship. That is, they will assume that the way to spot the most profitable product is to find the one using the least amount of constrained resource. The way to dispel this notion is to point out that Product A uses more material (the constrained resource) than Product B, but yet it is preferred over Product B.

The key factor is not how much of a constrained resource a product uses, but rather how much contribution margin the product generates per unit of the constrained resource.

Product A Product B Product C 1 Direct materials required per unit $          25.50 $           19.50 $            5.25 2 Cost per pound $            6.00 $ 6.00 $            6.00 3 Pounds required per unit (1)/ (2) 4.25 3.25 0.88 4 Contribution margin per unit $          34.00 $           16.25 $          22.50 5 Contribution margin per pound of materials used (4)/ (3) $            8.00 $ 5.00 $          25.71

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