Barlow Company manufactures three products—A, B, and C. The selling price, varia
ID: 2436523 • Letter: B
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:
Product
The same raw material is used in all three products. Barlow Company has only 6,000 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.
Required:
1. Calculate the contribution margin per pound of the constraining resource for each product.
2. Assuming that Barlow has unlimited demand for each of its three products, what is the maximum contribution margin the company can earn when using the 6,000 pounds of raw material on hand?
3. Assuming that Barlow’s estimated customer demand is 500 units per product line, what is the maximum contribution margin the company can earn when using the 6,000 pounds of raw material on hand?
4. A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. Assuming Barlow’s estimated customer demand is 500 units per product line and that the company has used its 6,000 pounds of raw material in an optimal fashion, what is the highest price Barlow Company should be willing to pay for an additional pound of materials?
Product
A B C Selling price $ 160 $ 270 $ 230 Variable expenses: Direct materials 16 80 24 Other variable expenses 108 90 152 Total variable expenses 124 170 176 Contribution margin $ 36 $ 100 $ 54 Contribution margin ratio 23 % 37 % 23 %Explanation / Answer
A Product A Product B Product C Product A Product B Product C Selling Price 160.00 270.00 230.00 Direct Material 16.00 80.00 24.00 Less: Variable Costs 124.00 170.00 176.00 PU Cost 8.00 8.00 8.00 Contribution Margin 36.00 100.00 54.00 Material PU 2.00 10.00 3.00 Direct Material Per PU 2.00 10.00 3.00 Contribution Margin Per Pound 18.00 10.00 18.00 A B A/B B Unlimited Demand: Material Avaiable Material PU Units CM PU CM Total Product A 6,000 2.00 3,000 36.00 1,08,000 Product B - Product C 6,000 3.00 2,000 54.00 1,08,000 Company can produce any one of Product A & C, Resulting in contribution 108000 A B C Limited Demand Material Avaiable Material PU Ranking Production as per Rank Product A 6,000 2.00 I 1,000 Material Left 3,500 Product B 6,000 10.00 II 3,500 (6000-1000-2500) Product C 6,000 3.00 I 1,500 Material PU of B 10.00 6,000 Units of Product B 350.00 Units CM PU CM Total Product A 500 36 18,000 Product B 350 100 35,000 Product C 500 54 27,000 Max Contru 80,000 D Units Left of Product B 150 (500-350) CM PU 100 CM TOTAL 15,000 Pounds Required 1,500 Max Payment Per Pound 10
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