Question

The company estimates that it can sell 800 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

Answer 1

Answer and Explanation:

1. The computation of contribution margin per pound is shown below:-

                                         Product A       Product B      Product C

Contribution margin per unit  $35.20              $11.60    $24.00

Direct materials                       $26.40              $12.00     $12.00

Material cost                              $3                     $3           $3

Material per unit                       $8.80                 $4.00      $4.00

                                ($26.40 ÷ $3)    ($12.00 ÷ $3)   ($12.00 ÷ $3)

Contribution margin per pound $4                    $2.90              $6

                        ($35.20 ÷ $8.80)        ($11.60 ÷ 4.00)      ($24.00 ÷ $4.00)

2.

Product A    Second

Product B    Third

Product C     First