Question

Exercise 11-12 Volume Trade-Off Decisions [LO11-5]

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

	Product
	A				B				C
Selling price	$	88.00			$	58.00			$	80.00
Variable expenses:
Direct materials		26.40				12.00				12.00
Other variable expenses		26.40				34.40				44.00
Total variable expenses		52.80				46.40				56.00
Contribution margin	$	35.20			$	11.60			$	24.00
Contribution margin ratio		40	%			20	%			30	%

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 5,400 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?

Answer 1

Requirement-1: $26.40 $12.00 $3.00 4.00 $35.20 $11.60 $2.90 12.00->(a) $3.00 4.00 24.00 -->(d) 6.00>(d)/ (c) Direct material cost per unit Direct material cost per pound Pounds of materials per unit Contribution margin per unit Contribution margin pound $3.00 8.80 $4.00 Requirement-2: The company is advised to accept Order-C first, Order-A second and Order-C third Justification: That is, order that yields the highest contribution margin per pound shall be accepted first; next highest contribution margin per pound shall be accepted second; least contribution margin pound shall be accepted third

Requirement-3 Number of units demanded Pounds of materials per unit Total pounds required 800 8.80 7,040 800 4.00 3,200 800 4.00 3,200 >(As calculated in Requirement-1] (u)x (c) Total pounds of materials available Pounds of materials for processing Order-C Pounds of materials for processing Order-A 5,400 3,200 2,200 Therefore 800 [A 2,200 pounds/8.80 pounds 250 units; C Entire units demanded] $24.00 $19, 200 [A-250 x $35.20 $8,800; B 0 x $11.60 = $0; C-800 x $24.00 = $19,200] Number of units produced & sold Contribution margin per unit Contribution margin earned 250 $35.20$11.60 $8,800 0 $28,000 $8,800 +S0+$19,200] Maximum contribution margin that the company can earn per month [If the company makes optimal use of its 5,400 pounds of materials]