Question

Stefanovich company manufactures three products—A, B, and C. The selling price, variable costs, and contribution margin...

Stefanovich company manufactures three products—A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow:

 Product A B C Selling price \$ 180 \$ 300 \$ 240 Variable expenses: Direct materials 24 80 32 Other variable expenses 102 100 148 Total variable expenses 126 180 180 Contribution margin \$ 54 \$ 120 \$ 60 Contribution margin ratio 30 % 40 % 25 %

The same raw material is used in all three products. The company has only 6,600 pounds of raw material on hand and will not be able to obtain any more of it for several weeks due to a strike in its supplier’s plant. Management is trying to decide which product(s) to concentrate on next week in filling its backlog of orders. The material costs \$8 per pound.

A foreign supplier could furnish the company with additional stocks of the raw material at a substantial premium over the usual price. Assuming the company’s estimated customer demand is 500 units per product line and that the company has used its 6,600 pounds of raw material in an optimal fashion, what is the highest price the company should be willing to pay for an additional pound of materials?

Multiple Choice

• \$12

• \$18

• \$23

• \$20

\$20

Selling price - Other exp = 300 - 100 = \$200/ 10 units = \$20 per raw material unit

Therefore, need additional raw material for Product B.

 A B C Selling price \$ 180 \$ 300 \$ 240 Variable expenses: Direct materials \$    24 \$    80 \$    32 Other variable expenses \$ 102 \$ 100 \$ 148 Total variable expenses \$ 126 \$ 180 \$ 180 Contribution \$    54 \$ 120 \$    60 Raw material unit (Direct materials/ \$8) \$      3 \$    10 \$      4 Contribution per raw material \$    18 \$    12 \$    15 Rank 1 3 2 Demand 500 500 500 Units utilized 1,500 3,100 2,000 Produced unit 500 258 500

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