Barlow Company manufactures three products-A, B, and C. each product follow The

Question

Barlow Company manufactures three products-A, B, and C. each product follow The selling price, variable costs, and contribution margin for one unit of Product Selling price Variable expenses: $180 270 240 80 90 -35170 126e 24 32 102180 Direct materials Other variable expenses Total variable expenses Contribution margin $ 54 $100 $ 66 30% 37% 25% Contribution margin ratio The same raw material is used in all three products. Barlow Company has only 6,000 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 $8 per pound. Required 1. Calculate the contribution margin per pound of the constraining resource for each product. 2. Assuming that Barlow has unlimited demand for each of its three products, what is the maximum contribution margin the company can earn when using the 6,000 pounds of raw material on hand? 3. Assuming that Barlow's estimated customer demand is 500 units per product line, what is the maximum contribution margin the company can earn when using the 6,000 pounds of raw material on hand? 4. A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price Assuming Barlow's estimated customer demand is 500 units per product line and that the company has used its 6,000 pounds of raw material in an optimal fashion, what is the highest price Barlow Company should be willing to pay for an additional pound of materials?

Explanation / Answer

1.Direct material required= Direct material cost/cost per pound

A=$24/$8=3 pounds

B=$80/$8=10 pounds

C=$32/$8=4 pounds

2. Since the company has unlimited demand for each product , it will produce product A because the contribution per unit of material is maximum in this case.

Contribution=$18× 6000 pounds

=$108000

3. Now the maximum demand is 500 units

First of all product A will be produced to maximum, then product C and then product B. This is in accordance with contribution per unit of constraint material from highest to lowest.

3.

* Raw material exhausted in producing unit A and C=3500 pounds

Remaining=2500 pounds

For producing 1 unit of B =10 pounds

Thus, B possible units=2500/10=250 units

4. To fulfill customer demand highest price could be at that point where the contribution from product B is zero.

Thus, $270-$90=$180 per unit

Raw material=$180/10 pounds=$18 per pound

Thus, highest price is $18 per pound

Do give your feedback!! Happy Learning :)

A B C Contribution margin per unit $54 $100 $60 Material in pounds per unit 3 10 4 Contribution per unit of material $18 $10 $15

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