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	$	92.00			$	66.00			$	82.00
Variable expenses:
Direct materials		27.60				18.00				12.00
Other variable expenses		27.60				31.50				45.40
Total variable expenses		55.20				49.50				57.40
Contribution margin	$	36.80			$	16.50			$	24.60
Contribution margin ratio		40	%			25	%			30	%

The company estimates that it can sell 950 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 6,100 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 6,100 pounds of materials?

Chapter 11: Homework i Saved Help Save a 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): points A $92.00 Product B $66.00 с $82.00 eBook 27.60 27.60 18.00 31.50 12.00 45.40 Print Selling price Variable expenses: Direct materials Other variable expenses Total variable expenses Contribution margin Contribution margin ratio 55.20 $36.80 49.50 $16.50 57.40 $24.60 References 40% 25% 30% The company estimates that it can sell 950 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 6,100 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 6,100 pounds of materials? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Calculate the contribution margin per pound of the constraining resource for each product. (Round your answers to 2 decimal places.) Product Product B Product C Contribution margin per pound of the constraining resource Required 1 Required 2 >

Answer 1

1. Calculation of contribution margin per pound of constraining resource for each product :

Particulars	Product A	Product B	Product C
Direct material cost per unit (a)	$27.6	$18	$12
Direct material cost per pound (b)	$3	$3	$3
Direct material pounds used per unit [a÷b] (A)	9.2pounds	6 pounds	4 pounds
Contribution margin per unit (B) (given in question)	$36.8	$16.5	$24.6
Contribution margin per pound of the constrained resource [B÷A]	$4 per pound	$2.75 per pound	$6.15 per pound

2. Since we have constraint resource , the preference should be given to the product by considering the contribution margin per pound of the constrained resource. In this case , FIRST preference should be given to PRODUCT C because contribution margin per pound of constrained resource is higher in Product C . SECOND preference is PRODUCT A. THIRD preference is PRODUCT B.

​​​​

Product	Rank
Product A	2
Product B	3
Product C	1

3. Calculation of maximum contribution margin if the company makes optimal use of its 6,100 pounds of materials.

Maximum demand for each product is 950 units per month. However we have only 6100 pounds of materials per month. So, first we have to produce the product which gives higher contribution margin per pound . So,we have to produce PRODUCT C which gives contribution margin of $6.15 per pound. Total pounds of materials to be used to produce Product C is [950 units * 4pounds per unit] = 3,800 pounds. The remaining pounds are to be used to produce the product which gives the next higher contribution margin per pound. The second product is PRODUCT A. No of units of Product A that can be manufacture with remaining 2300 pounds is [ 2300 pounds÷9.2 pounds ] =250 units of Product A. We cannot produce any unit of Product B because ,we do not have any pounds after manufacturing 950 units of Product C and 250 units of Product A

Particulars	Product A	Product B	Product C	Total
Maximum demand (a)	950 units	950 units	950 units
Direct material pounds required per unit (b)	9.2 pounds	6 pounds	4 pounds
Total direct material pounds required[a*b]	8,740 pounds	5,700 pounds	3,800 pounds	18,240 pounds
Available Direct material pounds				6100 pounds
Allocating direct material pounds as per contribution margin per pound [A]	2,300 pounds	0 pounds	3,800 pounds	6,100 pounds
No of units produced	250 units	0 units	950 units
Contribution margin per pound [B]	$4	$2.75	$6.15
Total Maximum Contribution margin[A*B]	$9,200	$0	$23,370	$32,570

THANK YOU.

PLEASE PROVIDE YOUR VALUABLE FEEDBACK.