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:

  

Product

330

  

The same raw material is used in all three products. Barlow Company has only 5,200 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 $7 per pound.

  

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

       

       

Which order would you recommend that the company work on next week—the orders for product A, product B, or product C?

  

A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials?

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

Explanation / Answer

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

  

2a. Compute the amount of contribution margin on each product.  

If the Raw Material is limited to 5200 Pound

Contribution margin on each product:

Product A = 14*5200 = $ 72,800

Product B = 11*5200 = $ 57,200

Product C = 12*5200 = $ 62,400

2b.Which order would you recommend that the company work on next week—the orders for product A, product B, or product C?

3) A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials?

Highest price that Barlow Company should be willing to pay for an additional pound of material =  Current material costs per pound + Maximum Contribution margin per pound

Highest price that Barlow Company should be willing to pay for an additional pound of material = 7 + 14

Highest price that Barlow Company should be willing to pay for an additional pound of material = $ 21

A B C   Selling price 210 330 320   Variable expenses:     Direct materials 21 63 28     Other variable expenses 147 168 244   Total variable expenses 168 231 272   Contribution margin 42 99 48 No of Pound required per unit ( Direct Material/7) 3.00 9.00 4.00   Contribution margin per pound (Contribution Margin/No of pound) 14.00 11.00 12.00

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