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Case Two
Case Two
Bistari Manufacture Sdn Bhd produces three products, A, B, and C. Data concerning the
three products follow (per unit):
Product
A B C
Demand for the company’s products is very strong, with far more orders each month than the
company can produce with the available raw materials. The same material is used in each
product. The material costs RM3 per pound with a maximum of 5,000 pounds available each
month.
Required:
Illustrate which orders would you advise the company to accept first, those for A, for B, or
for C? Which orders second? Third?
To identify which orders would company accept first, we would need to identify the highest
contribution margin that will be obtained per pound of material used among three products.
The table below illustrate the maximum contribution can be earned using 5,000 pounds of
raw materials by each product:
Product A Product B Product C
Contribution margin = RM 4 = RM 2.8 = RM 7
per pound (above)
Pounds of material = 5,000 pounds = 5,000 pounds = 5,000 pounds
available
Total contribution = RM 4 X 5,000 = RM 2.8 X 5,000 = RM 7 X 5,000
margin can be earned pounds pounds pounds
using 5,000 pounds of = RM 20,000 =RM14,000 = RM 35,000
raw materials
The company should concentrate its available raw material on Product C, then followed
by Product A and third would be Product B. Although product B has the second highest
contribution margin per unit, it is preferred over the other two products because it has greatest
amount of contribution margin per pound of raw material and the raw material is the
company’s constrained resource.