Barlow Company manufactures three.products: a, b and c.The selling price,variabl

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 stnke in its supplier's plant. Management is trying to deode which product(s) to concentrate on next week in filling its backlog of orders. The material costs $8 per pound. Required: 1.Compute the amount of contribution margin that will be obtained per pound of material used in each product. 2.Which orders would you recommend that the company work on next week-the orders for product A. product B. or product C? Show computations. 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? Explain. Wexpro. Inc., produces several products from processing 1 ton of clypton, a rare mineral Material and processing costs total S60.000 per ton, one-fourth of which is allocated to product X15. Seven thousand units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $9 each, or processed further at a total cost of $9,500 and then sold for $12 each. Required: Should product X15 be processed further or sold at the split-off point?

Explanation / Answer

(12-8)

(1) Contribution margin (CM) per pound

Material used = Direct material cost / Unit material cost

A: $24 / $8 = 3 pounds

CM per pound (A) = $54 / 3 = $18

B: $72 / $8 = 9 pounds

CM per Pound (B) = $108 / 9 = $12

C: $32 / $8 = 4 pounds

CM per pound (C) = $60 / 4 = $15

(2) Since product A has the highest contribution margin per unit of the limiting factor (material), A should be worked on.

(3) Highest premium (above the regular price) that Barlow will pay is the maximum difference between the contribution margin per pound of material across A, B, C. This is $6 (= $18 (A) - $12 (B)).

So, highest price = Regular price + Premium = $(8 + 6) = $14

NOTE: first question is answered.

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