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 Selling price $200 $250 $220 Variable expenses Direct materials 32 80 40 Other variable expenses Total variable expenses Contribution margin Contribution margin ratio 108 140 60 30% 70 150 $100 125 165 $ 55 40% 25% The same raw material is used in all three products. Barlow Company has only 5,300 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 products) 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. Contribution margin per unit Direct material cost per unit Direct material cost per pound Pounds of material required per unit Contribution margin per pound 2a. Compute the amount of contribution margin on each product. Contribution margin per pound Pounds of material available Total contribution margin

Explanation / Answer

1.

A

B

C

Contribution margin per unit

$ 60

$ 100

$ 55

Direct material cost per unit

$ 32

$ 80

$ 40

Direct material cost per pound

$ 8

$ 8

$ 8

Pounds of raw material required per unit

4

10

5

Contribution margin per pound

$ 15

$ 10

$ 11

2a.

A

B

C

Contribution margin per pound

$ 15

$ 10

$ 11

Pounds of material available

           5,300

           5,300

           5,300

Total contribution margin

$ 79,500

$ 53,000

$ 58,300

2b.

Product A is recommended because Product A is having the highest contribution margin.

3.

The price Barlow Company would be willing to pay per pound for additional raw materials depend on how the materials would be used. If there are unfilled orders for all of the products, Barlow would presumably use the additional raw materials to make more of product A. Each pound of raw materials used in product A generates $15 of contribution margin over and above the usual cost of raw materials. Therefore, Barlow should be willing to pay up to $23 per pound ($8 usual price plus $15 contribution margin per pound) for the additional raw material, but would of course prefer to pay far less. The upper limit of $23 per pound to manufacture more product A signals to managers how valuable additional raw materials are to the company.

If all of the orders for product A have been filled, Barlow Company would then use additional raw materials to manufacture product C. The company should be willing to pay up to $19 per pound ($8 usual price plus $11 contribution margin per pound) for the additional raw materials to manufacture more product C, and up to $18 per pound ($8 usual price plus $10 contribution margin per pound) to manufacture more product B if all of the orders for product C have been filled as well.

A

B

C

Contribution margin per unit

$ 60

$ 100

$ 55

Direct material cost per unit

$ 32

$ 80

$ 40

Direct material cost per pound

$ 8

$ 8

$ 8

Pounds of raw material required per unit

4

10

5

Contribution margin per pound

$ 15

$ 10

$ 11

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