Barlow Company manufactures three products: A, B, and C. The selling price, vari

Question

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

The same raw material is used in all three products.  Barlow Company has only 5,000 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.  Demand for each product is 700 units.

A.How many pounds of material would be required to satisfy demand for all three products?  This is in total, not for just one unit.

B. Compute the amount of contribution margin that will be obtained per pound of material used in each product.

C. Which product would you recommend that the company work on next week first? Second? Third?

D. Based on your decision in (c), what is the maximum contribution margin the company will make next week?

Explanation / Answer

PARTICULARS A B C Selling price 180 270 240 Less variable expenses: Direct materials (a) 24 72 32 Other variable expenses 102 90 148 Total variable expenses 126 162 180 Contribution margin 54 108 60 Materials required per unit (a/8) 3 9 4 Contribution margin per pound of material 18 12 15 RANKING 1 3 2 A) Demand for each product (units) 700 700 700 Materials required per unit (a/8) 3 9 4 Materials required for all the demand 2100 6300 2800 11200 Total Materials required 11200 pounds B) Contribution margin per pound of material 18 12 15 C) I would recommend based on ranking the production of products in the given below order A,C,B D)Maximum contribution company makes Contribution from A (700 x 54) 37800 Contribution from C (700x15) 10500 Contribution from B (25 x 12) 300 TOTAL CONTRIBUTION 48600 Working Notes No.of pounds left (5000 - 2100 - 2800) 100 No of.units of B produced (100/4) 25

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