Question

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

	Product
	A				B				C
Selling price	$	84.00			$	66.00			$	74.00
Variable expenses:
Direct materials		25.20				18.00				9.00
Other variable expenses		25.20				31.50				42.80
Total variable expenses		50.40				49.50				51.80
Contribution margin	$	33.60			$	16.50			$	22.20
Contribution margin ratio		40	%			25	%			30	%

The company estimates that it can sell 850 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 5,700 pounds available each month.

Required:

1. Calculate the contribution margin per pound of the constraining resource for each product.

Product A Product B Product C Contribution margin per pound of the constraining resource

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 5,700 pounds of materials?

Answer 1

1
		A	B	C
	Selling Price	84.00	66.00	74.00
	Less: Variable Expense
	Direct Material	25.2	18	9
	Other Variable Expense	25.2	31.5	42.8
	Contribution Margin	33.60	16.50	22.20
	Direct Material PU in Qty	8.40	6.00	3.00
	Contribution Margin Per DM Qty	4.0	2.8	7.4
	Ranking	II	III	I
		Contribution Margin Per DM Qty	Ranking
2	A	4.00	II
	B	2.75	III
	C	7.40	I
3		Contribution Margin Per DM Qty	Ranking	Max Qty	DM Qty PU
	A	4.00	II	375	8.40	3,150	(5700-2550)
	B	2.75	III		6.00
	C	7.40	I	850	3.00	2,550
						5,700
		Contribution Margin Per DM Qty		Max CM Total
	A	4.00	375	1,500
	B	2.75	-
	C	7.40	850	6,290
				7,790