Question

Exercise 12-12 Volume Trade-Off Decisions [LO12-5]

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

	Product
	A				B				C
Selling price	$	90.00			$	60.00			$	80.00
Variable expenses:
Direct materials		27.00				18.00				9.00
Other variable expenses		27.00				27.00				47.00
Total variable expenses		54.00				45.00				56.00
Contribution margin	$	36.00			$	15.00			$	24.00
Contribution margin ratio		40	%			25	%			30	%

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?

Answer 1

1) Contribution margin per pound:

	A	B	C
Contribution margin per unit   $	36	15	24
Pound per unit A=27/3,B=18/3,C=9/3	9	6	3
Contribution margin per pound	4	2.5	8
Ranking	2	3	1

2) Optimum use

Product	rank
Product A	Second
product B	Third
Product C	First

3) Maximum contribution margin

Product	Pound available	Pounds consumed	Units produced
C	5400	750*3= 2250	750
A	5400-2250= 3150	3150	3150/9 pound =350
B	3600-3600=0	0	0

Contribution margin: [750*$36]+[0*$15]+[350*24]

= 27000+0+8400

= $ 27000