Benoit Company produces three products—A, B, and C. Data concerning the three pr

Question

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

Product

84.00

The company estimates that it can sell 750 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 5,400 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 5,400 pounds of materials?

Product

A B C Selling price $

84.00

$ 70.00 $ 74.00 Variable expenses: Direct materials 25.20 21.00 9.00 Other variable expenses 25.20 31.50 42.80 Total variable expenses 50.40 52.50 51.80 Contribution margin $ 33.60 $ 17.50 $ 22.20 Contribution margin ratio 40 % 25 % 30 %

Explanation / Answer

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 5,400 pounds of materials?

Maximum contribution = (2250*7.4+375*33.60) = 29250

A B C Contribution margin per unit 33.60 17.50 22.20 Pound per unit 8.40 7.00 3.00 Contribution margin per pound 4.00 2.50 7.40

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