Question

Exercise 11-12 Volume Trade-Off Decisions [LO11-5]

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

	Product
	A				B				C
Selling price	$	88.00			$	72.00			$	78.00
Variable expenses:
Direct materials		26.40				18.00				9.00
Other variable expenses		26.40				36.00				45.60
Total variable expenses		52.80				54.00				54.60
Contribution margin	$	35.20			$	18.00			$	23.40
Contribution margin ratio		40	%			25	%			30	%

The company estimates that it can sell 900 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 6,000 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 6,000 pounds of materials?

Answer 1

1.

	A	B	C
Contribution margin per unit	$35.2	$18	$23.4
Pounds of raw materials per unit	8.8 ($26.4/$3)	6 ($18/$3)	3 ($9/$3)
Contribution margin per pound	$4 ($35.2/8.8)	$3 ($18/6)	$7.8 ($23.4/3)

2.

Product A	Second
Product B	Third
Product C	First

3.

Product C	900
Product A	375

Raw materials remaining after Product C is made = 6,000 - (900 * 3) = 3,300 pounds

Product A = 3,300 / 8.8 = 375 units

Maximum contribution margin = Product C + Product A

= (900 * $23.4) + (375 * $35.2)

= $21,060 + $13,200

= $34,260