Question

Question - 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?

A $75.00 Product B $64.00 C $66.00 Selling price Variable expenses: Direct materials Other variable expenses Total variable expenses Contribution margin Contribution margin ratio 22.50 22.50 45.00 $30.00 15.00 33.00 48.00 $16.00 25% 12.00 34.20 46.20 $19.80 30% 40% The company estimates that it can sell 900 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.

Answer 1

Calculation of maximum contribution margin

Particulars	A	B	C
Contribution Margin per unit	30	16	19.80
Material per unit( in pounds)	22.5/3=7.5	15/3=5	12/3=4
Contribution Margin / Material	30/7.5=4	16/5=3.2	19.8/4=4.95
Ranking for manufacturing	II	III	I

Since material is limited resource hence company will manufacture that product first which fetches maximum contribution per material.

Calculation of Maximum Contribution Margin

Product C = 900 units * 4 * 4.95 =17820

Product A = 240 units *7.5 *4 =7200

Maximum Contribution Margin = 25020

Note-----Since 5400 pounds of materials is exhausted in producing 900 units of product C (900*4=3600) and 240 units of Product A (240*7.5=1800)