Reference no: EM132603115

A company manufactures three products-A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow:

                                                                               Product

                                                A                             B                     C

Selling price                                $180                  $280              $240

Variable expenses:

Direct materials                               24                  80                     32

Other variable expenses                   102                  100                    148

Total variable expenses                    126                     180                  180

Contribution margin                           $54                  $100                   $60

Contribution margin ratio                       30%                 35.71%               25%

The same raw material is used in all three products. The company has only 6,600 pounds of raw material on hand and will not be able to obtain any more of it for several weeks due to a strike in its supplier's plant. Management is trying to decide which product(s) to concentrate on next week in filling its backlog of orders. The material costs $8 per pound.

Question 1: A foreign supplier could furnish the company with additional stocks of the raw material at a substantial premium over the usual price. Assuming the company's estimated customer demand is 500 units per product line and that the company has used its 6,600 pounds of raw material in an optimal fashion, what is the highest price the company should be willing to pay for an additional pound of materials?

Multiple Choice

Option 1: $18

Option 2: $24

Option 3: $10

Option 4: $25