Question

Benoit Company produces three products—A, B, and C. Data concerning the three products follow (per unit): Product A B C Selling price $ 72.00 $ 60.00 $ 62.00 Variable expenses: Direct materials 21.60 18.00 9.00 Other variable expenses 21.60 27.00 34.40 Total variable expenses 43.20 45.00 43.40 Contribution margin $ 28.80 $ 15.00 $ 18.60 Contribution margin ratio 40 % 25 % 30 % The company estimates that it can sell 1,000 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 6,600 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 6,600 pounds of materials?

Answer 1

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

	Product A	Product B	Product C
Contribution margin per unit	28.80	15.00	18.60
Material per unit	7.20	6.00	3.00
Contribution margin per material pound	4	2.5	6.2

2. Which orders would you advise the company to accept first, those for A, B, or C? Which orders second? Third?

Product A	Second
Product B	Third
Product C	First

3. What is the maximum contribution margin that the company can earn per month if it makes optimal use of its 6,600 pounds of materials?

Total pound available	6600 pound
Product C pound (1000*3)	3000 pound
Balance pound	3600 pound
Product A (3600/7.20)	500 units

Maximum contribution = (1000*18.60+500*28.80) = 33000