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: A Product B C Selling price $280 $400 $360 Variable expenses: Direct materials 14 56 21 Other variable expenses 154 144 213 Total variable expenses 168 200 234 Contribution margin $112 $200 $126 Contribution margin ratio 40% 50% 35% The same raw material is used in all three products. Barlow Company has only 4,300 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. Required: Compute the amount of contribution margin that will be obtained per pound of material used in each product. Compute the amount of contribution margin on each product. Which order would you recommend that the company work on next week-the orders for product A, product B, or product C? Product A Product B 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?

Explanation / Answer

Product A B C Selling Price 280 400 360 Variable expenses       Direct Material 14 56 21       Other Variable expenses 154 144 213 Total variable expenses 168 200 234 Contribution margin 112 200 126 Contribution margin ratio 40% 50% 35% 1) Contribution margin per unit 112 200 126 Direct material cost per unit 14 56 21 Cost of Raw material per pound 7 7 7 Direct material required per unit 2 8 3 ( Direct ,material / Cost per unit) Contribution per pound of material 56 25 42 ( Contribution per unit / material required per unit) 2a) Contribution per pound of material 56 25 42 Pounds of material available 4300 4300 4300 Total contribution margin 240800 107500 180600 2b) As the total contribution is highest for Product A , Product A should be worked on next week 3) The highest price that Barlow company should be willing to pay is $ 25, which is the lowest contribution on Product B , because if raw ,material is bought for more than this amount , then Product B will become unviable and eat into Product A & Product C profit

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