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 A

Selling Price $92

Variable Expenses

Direct Materials $27.60

Other Variable Expeneses $27.60

Total Variable Expenses $55.20

Contribution Margin $36.80

Contribution Margin Ratio 40%

Product B

Selling Price $66.00

Variable Expenses

Direct Materials $18.00

Other Variable Expeneses $31.50

Total Variable Expenses $49.50

Contribution Margin $16.50

Contribution Margin Ratio 25%

Product C

Selling Price $82.00

Variable Expenses

Direct Materials $12.00

Other Variable Expeneses $45.40

Total Variable Expenses $57.40

Contribution Margin $24.60

Contribution Margin Ratio 30%

The company estimates that it can sell 950 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 6,100 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 6,100 pounds of materials?

Explanation / Answer

Solution: 1. The contribution margin per pound of the constraining resource for each product are given below: Product Contribution Margin per pound A $4 B $2.75 C $6.15 Working Notes: Since, all the product are made of same material , the material is constraint in the given case. Product A Product B Product C Contribution margin per unit 36.8 16.5 24.6 a (given) Material cost per unit of product $27.60 $18 $12 b (given) per pound material cost $3 $3 $3 c Material used in per unit of product 9.2 6 4 d=(b/c) (pound) Hence, Contribution margin per pound (I / II) $4.00 $2.75 $6.15 e=(a/d) Ranking based on contribution margin per pound of materials 2nd 3rd 1st 2. Product order A 2nd B 3rd C 1st Working Notes: From our calculation in 1. we have get that contribution margin per pound is highest for product C then product A and at last product B hence, Hence, it is advisable to the company to first produce product C then Product A and last with left material if any produce product B. 3. The maximum contribution margin that the company can earn per month = $32,570 Working Notes: Product A Product B Product C Maximum demand per month 950 units 950 units 950 units a Material used in per unit of product 9.2 6 4 b=from above 1. total pound of material required 950x9.2 = 8,740 950 x 6 =5,700 950x4 = 3,800 c=axb Ranking of our production 2nd 3rd 1st hence material allocation of 6,100 pounds 2,300 nil 3,800 (6,100-3800) Each month we have only 6,100 pound of material it can be used based on ranking to earn maximum contribution margin The maximum contribution margin that the company can earn per month a b c pound Contribution margin per pound maximum contribution margin Product C 3800 6.15                       23,370 product A 2300 4                         9,200 Product B 0 2.75                                -   Total 6100                       32,570 So, The maximum contribution margin that the company can earn per month = $32,570 Please feel free to ask if anything about above solution in comment section of the question.

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