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Wondrous Aromas Company has three lines of perfume: Red, Green, and Blue. After megacelebrity Caitlyn Spencer tweeted that this was her favourite line of perfume, demand for all three products has been off the charts. The company has a problem, it has a limited supply of orchid nectar, a common ingredient in all three products. Orchid nectar costs $5 per gram and is the major selling feature of all three perfumes. Cost data follow: Red Green Blue Price $200 $160 $80 Variable expenses Orchid nectar 50 30 20 Other direct materials 15 25 15 Direct labour 20 25 10 Variable manufacturing overhead 15 10 10 Total variable cost 100 90 55 Contribution margin $100 $70 $25
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Question a.) Which product would you recommend the company focus on producing first? Second? Third?
Question b.) A supplier emerges willing to provide the company with more orchid nectar, but for a major premium. What is the maximum the company should be willing to pay per gram of orchid nectar as long as there is unfilled demand for all three perfumes?
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