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 $210 $360 $320 Variable expenses Direct materials 27 81 36 Other variable expenses Total variable expenses Contribution margin Contribution margin ratio 120 147 63 135 216 $144 204 240 $ 80 30% 4% 25% The same raw material is used in all three products. Barlow Company has only 5,800 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 filing its backlog of orders. The material costs $9 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

Explanation / Answer

Barlow Company

Products

A

B

C

Contribution margin per unit

$63

$144

$80

Direct material cost per pound

$9

$9

$9

Direct material cost per unit

$27

$81

$36

Pound of material required per unit

27/9= 3 pounds

81/9 = 9 pounds

36/9 = 4 pounds

Contribution margin per pound

63/3

144/9

80/4

Contribution margin per pound

$21

$16

$20

Ranking

I

III

II

Notes –

Pound of material required per unit = direct material cost per unit/direct material cost per pound

Contribution margin per pound = contribution margin per unit/pound of materials required per unit

2a. Computation of the amount of contribution margin on each product:

Products

A

B

C

Contribution margin per pound

$21

$16

$20

Pounds of material available

5,800

5,800

5,800

Total contribution margin

$121,800

$92,800

$116,000

Ranking

I

III

II

2b. Recommendation –

Product A

Explanation: Product A earns highest contribution margin per pound as well as total contribution margin based on pounds per unit.Though Product A’s contribution margin per unit and contribution margin ratio are very low compared to other products’ data, Product A earns highest contribution margin. Hence, Product A is recommended.

3 The price to be quoted for additional pound of raw materials depends primarily on the expected demand of each of the products.

Since Product A earns highest contribution margin per pound, the company would use the available materials to produce maximum units of A. So, considering the contribution margin per pound of A ($21) and the cost per pound, $9, the maximum price can go up to $30 per pound of material. However, the company might negotiate for a lower price.

Once, the company produces enough units of Product A to meet its regular demand or maximum demand then the company would focus on producing Product C as it ranks second in terms of contribution margin per pound. Under these conditions, the company might agree to pay $29 ($20 + $9) per additional pound of direct material to meet the regular demand of Product C.

Once, the company produces enough units of Product C, the company would then focus on Product B, which earns the least contribution margin per pound of material. Under these conditions, the company might agree to pay $25 ($16 +$9) for additional pounds of material to manufacture Product B.

Hence, determination of maximum amount per pound that the company is willing to pay depends on the above circumstances and the maximum expected demand for each product.

Nevertheless, since product A earns the highest contribution per pound of material, the maximum amount per pound that the company would be willing to pay for additional pounds of material = $30

Products

A

B

C

Contribution margin per unit

$63

$144

$80

Direct material cost per pound

$9

$9

$9

Direct material cost per unit

$27

$81

$36

Pound of material required per unit

27/9= 3 pounds

81/9 = 9 pounds

36/9 = 4 pounds

Contribution margin per pound

63/3

144/9

80/4

Contribution margin per pound

$21

$16

$20

Ranking

I

III

II

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