Question

chip company produces three products, kin, ike, and bix. each product uses the same direct material. kin uses 4.5 pounds of the material, ike uses 2.6 pounds of the material, and bix uses 5.4 pounds of the material. selling price per unit and variable costs per unit of each product follow.
selling price per unit: kin $172.40, ike $108.66, bix $203.40
variable costs per unit: kin 104.00, ike 85.00, bix 144.00
(a) compute contribution margin per pound of material for each product.
(b) if demand is limited, list the three products in the order in which management should produce and meet demand.
(a) product contribution margin
item: kin, ike, bix
contribution margin per unit
pounds per unit
contribution margin per pound: kin $15.20, ike $9.10, bix $11.00
(b) if demand is limited, list the three products in the order in which management should produce and meet demand: kin first, ike third, bix second

Explanation:

Step1: Calculate contribution margin per unit

Contribution margin per unit = Selling price per unit - Variable costs per unit
For Kin: \(172.40 - 104.00=\$68.40\)
For Ike: \(108.66 - 85.00=\$23.66\)
For Bix: \(203.40 - 144.00=\$59.40\)

Step2: Calculate contribution margin per pound

Contribution margin per pound=\(\frac{\text{Contribution margin per unit}}{\text{Pounds per unit}}\)
For Kin: \(\frac{68.40}{4.5}=\$15.20\)
For Ike: \(\frac{23.66}{2.6}=\$9.10\)
For Bix: \(\frac{59.40}{5.4}=\$11.00\)

Step3: Determine production order

When demand is limited (assuming material is a constrained resource), produce products in descending order of contribution margin per pound.

Answer:

(a)

Item	Kin	Ike	Bix
Pounds per unit	\(4.5\)	\(2.6\)	\(5.4\)
Contribution margin per pound	\(\$15.20\)	\(\$9.10\)	\(\$11.00\)

(b)
First: Kin (highest contribution margin per pound), Second: Bix, Third: Ike (lowest contribution margin per pound)