Question

Selling price $

84.00

$ 70.00 $ 74.00
Variable expenses:
Direct materials 25.20 21.00 9.00
Other variable expenses 25.20 31.50 42.80
Total variable expenses 50.40 52.50 51.80
Contribution margin $ 33.60 $ 17.50 $ 22.20
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

Requirement 1:

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

Contribution margin per Pound of Raw material:

Product A: $4.00

Product B: $2.50

Product C: $7.40

Requirement 2:

Which orders would you advise the company to accept first, those for A, B, or C?

Product ranking:

Product C: (I)

Product A: (II)

Product B: (III)

Requirement 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?

Maximum contribution = $29,250

Step-by-step explanation:

Workings are attached in the tabular form.

Note: The product with highest contribution margin per pound of raw material should be made first .