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

270

  

The same raw material is used in all three products. Barlow Company has only 5,500 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?

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

$54/6 = 9 pounds

2a.

Amount of contribution margin on each product is already given I.e. A - $57 per unit, B - $108 per unit, C - $60 per unit

2b.

The company should work on Product A first since it provides highest contribution margin per pound of limited raw material and if its demand is fully satisfied than work on Product C and if product C demand is also satisfied lastly work on Product B

Therefore, company should work on Product A next week since it provides contribution of $19 per pound of material

3.

If there is unfilled demand for all three products than the substantial premium that Barlow company will be willing to pay for an additional pound of material is $19 per pound which is the per pound contribution on Product A. Therefore highest price that Barlow company will be willing to pay for additional pound of materual is ($19+$6) = $25 per pound

A B C Contribution margin $57 $108 $60 Material required per unit $18/6 = 3 pounds

$54/6 = 9 pounds

$24/6 = 4 pounds Contribution margin per pound of raw material $19 per pound $12 per pound $15 per pound

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