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

320

  

The same raw material is used in all three products. Barlow Company has only 5,900 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 $6 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?

     

Product

A B C   Selling price $ 230 $

320

$ 280   Variable expenses:     Direct materials 12 48 18     Other variable expenses 172 176 220   Total variable expenses 184 224 238   Contribution margin $ 46 $ 96 $ 42   Contribution margin ratio 20 % 30 % 15 %

Explanation / Answer

1.

2a. Contribution margin on each product:

2 b..The company should work on product A next week, as its contribution margin is the highest, subject to its maximum demand. After the demand for product A is satisfied, product C should be worked on.

3. The company should be willing to pay the regular price plus the contribution margin per pound from product A., ie $ 6 + $ 23 = $ 29 per pound.

Once all the orders of product A are filled, Barlow company should work on prduct C, and it should be willing to pay $ 6 + $ 14 = $ 20 per pound.

A B C Contribution margin per unit $ 46 $ 96 $ 42 Direct material consumed ( direct material cost / 6) 2 lb 8lb 3lb Contribution per pound of limiting factor,i.e materials 23 12 14

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