Barlow Company manufactures three products-A, B, and C. The selling price, varia
ID: 2531782 • Letter: B
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 $180 $300 250 Selling price Variable expenses: 20 120 140 $40 30 184 214 90 36 Direct materials 90 - 120 210 Other variable expenses Total variable expenses Contribution margin Contribution margin ratio 22% 14% 30 The same raw material is used in all three products. Barlow Company has only 5,400 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 $10 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 5,400 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 5,400 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 5,400 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? Complete this question by entering your answers in the tabs below Required 1Required 2Required 3 Required 4 Calculate the contribution margin per pound of the constraining resource for each product. Contribution margin per pound of the constrained resourceExplanation / Answer
Part 1:
Products
A
B
C
Direct materials required in pound ( Direct material cost / 10)
2
9
3
Contribution per unit
40
90
36
Direct materials required in pound ( Direct material cost / 10)
2
9
3
Contribution per pound of direct material
20
10
12
(40/2; 90/9; 36/3)
Part 2:
Products
A
B
C
Contribution per unit
40
90
36
Direct materials required in pound ( Direct material cost / 10)
2
9
3
Contribution per pound of direct material
20
10
12
(40/2; 90/9; 36/3)
Ranking on the basis of constraining factor
1
3
2
Maximum contribution margin will be earned by using the all direct materials to manufacture Product A
Number of A to be produced
2700
(5400 / 2)
Contribution of each unit of A
40
Total contribution (2700 x 40)
108000
Part 3:
Products
A
B
C
Contribution per unit
40
90
36
Direct materials required in pound ( Direct material cost / 10)
2
9
3
Contribution per pound of direct material
20
10
12
(40/2; 90/9; 36/3)
Ranking on the basis of constraining factor
1
3
2
Number of units to be produced
500
500
Raw materials to be used
1000
1500
(500 x 2) (500 x 3)
Total raw materials used in A and C
(1000 + 1500)
2500 pound
Direct raw materials remaining for production of B
Total raw materials available
5400
Less: Raw materials used in A and C
2500
Raw materials to be used for production of B
2900
Number of B to be produced (2900 / 9)
322.2222
322
Products
A
B
C
Contribution per unit
40
90
36
Number of units to be produced
500
322
500
Total contribution from each product
20000
28980
18000
(500 x 40; 322 x 90; 500 x 36)
Total contribution margin (20000 + 28980 + 18000)
66980
Part 4: Optimal use of direct raw materials will be made as following:
Products
A
B
C
Contribution per unit
40
90
36
Number of units to be produced
500
322
500
Total contribution from each product
20000
28980
18000
(500 x 40; 322 x 90; 500 x 36)
Thus, the additional raw materials at premium will have to be acquired for production of B. Production of each unit of B requires 9 pound of direct materials. Since the contribution from production and sale of each unit of B is $90. Thus, the maximum amount of premium to be paid for raw materials is (90/9) = $10.00 per pound. Thus, the maximum price shall be paid for acquisition of raw materials (10+10) = $20 per pound.
Part 1:
Products
A
B
C
Direct materials required in pound ( Direct material cost / 10)
2
9
3
Contribution per unit
40
90
36
Direct materials required in pound ( Direct material cost / 10)
2
9
3
Contribution per pound of direct material
20
10
12
(40/2; 90/9; 36/3)
Part 2:
Products
A
B
C
Contribution per unit
40
90
36
Direct materials required in pound ( Direct material cost / 10)
2
9
3
Contribution per pound of direct material
20
10
12
(40/2; 90/9; 36/3)
Ranking on the basis of constraining factor
1
3
2
Maximum contribution margin will be earned by using the all direct materials to manufacture Product A
Number of A to be produced
2700
(5400 / 2)
Contribution of each unit of A
40
Total contribution (2700 x 40)
108000
Part 3:
Products
A
B
C
Contribution per unit
40
90
36
Direct materials required in pound ( Direct material cost / 10)
2
9
3
Contribution per pound of direct material
20
10
12
(40/2; 90/9; 36/3)
Ranking on the basis of constraining factor
1
3
2
Number of units to be produced
500
500
Raw materials to be used
1000
1500
(500 x 2) (500 x 3)
Total raw materials used in A and C
(1000 + 1500)
2500 pound
Direct raw materials remaining for production of B
Total raw materials available
5400
Less: Raw materials used in A and C
2500
Raw materials to be used for production of B
2900
Number of B to be produced (2900 / 9)
322.2222
322
Products
A
B
C
Contribution per unit
40
90
36
Number of units to be produced
500
322
500
Total contribution from each product
20000
28980
18000
(500 x 40; 322 x 90; 500 x 36)
Total contribution margin (20000 + 28980 + 18000)
66980
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