Benoit Company produces three products—A, B, and C. Data concerning the three pr
ID: 2525168 • Letter: B
Question
Benoit Company produces three products—A, B, and C. Data concerning the three products follow (per unit):
Product
The company estimates that it can sell 800 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 5,000 pounds available each month.
What is the maximum contribution margin that the company can earn per month if it makes optimal use of its 5,000 pounds of materials?
Product
A B C Selling price $ 80 $ 56 $ 70 Variable expenses: Direct materials 24 15 9 Other variable expenses 24 27 40 Total variable expenses 48 42 49 Contribution margin $ 32 $ 14 $ 21 Contribution margin ratio 40 % 25 % 30 %Explanation / Answer
Answers
Working
A
B
C
A
Direct Material per unit
$24
$15
$9
B
material cost per pound
$3
$3
$3
C= A / B
Pound of material required per unit
8
5
3
D
Contribution margin per unit
$32
$14
$21
E= D / C
Contribution margin per pound of raw material
$4
$2.8
$7
Order of preference to allocate material
2nd
3rd
1st
Since, Product C has maximum ‘contribution margin per pound’ it will be given 1st preference, followed by ‘A’ and then ‘B’
A
B
C
Maximum units that can be sold (A)
800
800
800
Material required per unit [in pounds] (B)
8
5
3
Total Material requirement (C) in pounds
6400
4000
2400
Available material in pounds
5000 pounds
(-) First allocation to Product C
2400 pounds
Remaining material
2600 pounds
(-) Second allocation to Product A
2600 pounds
Remaining for Product B
0 pound
A
B
C
Total
Material [in pounds] allocated (A)
2600 pounds
0 pound
2400 pounds
5000 pounds
Contribution per pound (B) [calculated in working above]
$4
$2.8
$7
Total contribution margin (A x B)
$10,400
$0
$16,800
$27,200
Hence, total contribution margin will be $27,200
Working
A
B
C
A
Direct Material per unit
$24
$15
$9
B
material cost per pound
$3
$3
$3
C= A / B
Pound of material required per unit
8
5
3
D
Contribution margin per unit
$32
$14
$21
E= D / C
Contribution margin per pound of raw material
$4
$2.8
$7
Order of preference to allocate material
2nd
3rd
1st
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