Question

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

Answer 1

Solution :

$\text{Working }$                                                   $\text{A}$             $\text{B}$          $\text{C}$

A    ($\text{Direct material per unit}$)                  $ 24        $ 15      $9

B    (Material cost per pound)                 $3            $3       $3

C=A/B (pound of material per unit)          8             5          3

D   (Contribution margin per unit)          $32         $14       $21

E=D/C (Contribution margin pound       $ 4           $ 2.8    $ 7

           of raw materials)

Order of preference to allocate material  2nd     3rd       1st

Since the product C has maximize 'contribution margin per pound' it will give 1st preference, followed by the product A and B.

The allocation of the available 5000 pounds of the raw material.

                                                                    A              B               C

Maximize units that can be sold (A)        1000         1000         1000  

Materials required per unit (B)                  8                5                3

Total material requirement (C)                 8000       5000         3000

Available raw material in pounds             5000 pounds

(-) first allocation to product C                   3000 pounds

Remaining material                                     2000 pounds

(-) seconds allocation to product A          2000 pounds

Remaining for the product B                        0 pounds

Now calculating the total contribution on the above allocation basis.

                                                               A          B                  C            Total

Material allocated to A(pounds)      2000        0                 3000      5000

Contribution per pound (B)                $ 4        $2.8                $7

Total contribution margin (AxB)      $8000     $0               $21000     $29,000

Therefore, the total contribution margin is $29,000.