Question

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?

Answer 1

	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%
Material Qty required per unit s(In pound)	3	10	4
Contribution per 1 unit of raw material	18	12	15
Ranking of production	1	3	2
No. of Units can be produced with the available material	500	310	500
Material consumed(in pounds)	1500	3100	2000
		(Balancing Figure)
		(6600-1500-2000)
highest price the company should be willing to pay for an additional pound of materials	12	(i.e. Contribution per unit of material for product B whose demand can not be fulfilled from available resources)