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?

Homework Answers

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)
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