Barlow Company manufactures three products—A, B, and C. The selling price, varia

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

The same raw material is used in all three products. Barlow Company has only 6,600 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 6,600 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 6,600 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 6,600 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?

Product

A B C Selling price $ 180 $ 270 $ 240 Variable expenses: Direct materials 24 80 32 Other variable expenses 102 90 148 Total variable expenses 126 170 180 Contribution margin $ 54 $ 100 $ 60 Contribution margin ratio 30 % 37 % 25 % Exercke 12.8 6pt each produ toloe r mnamy can eern when Lan fte EicaX) penna f mw m.fr11 ?, hild'

Explanation / Answer

Solution: 1 Computation of contribution margin per pound: A B C Contribution Margin per unit 54 100 60 Direct Material Cost per unit 24 80 32 Direct Material Cost per Pound 8 8 8 Pounds of Material used per unit 3 10 4 Contribution Margin Per Pound 18 10 15 2 The material is constrain for the production. The contribution margin per pound of product A is highset. So the company will produce the product A for getting highest contribution. The available material = 6600 pounds The material require for each unit production of A = 3 So total Product A produce = (6600/3) = 2200 units Contribution per unit of Product A = 54 So total Contribution = (54*2200) = $ 1,18,800 3 Material Available is 6600 pounds Demand for each product 500 units As per contributionper pound the ranking is: Ranking 1 = Product A Ranking 2 = Product C Ranking 3 = Product B So no units produce: Total Material     6,600.00 Less: Material Used for Product A (500*3)     1,500.00     5,100.00 Less: Material Used for Product C (500*4)     2,000.00 Material Available for product B     3,100.00 Material require for 1 unit of product B           10.00 So no of units produce        310.00 So the total Contribution: From Product A (500*54) 27,000.00 From Product B (310*100) 31,000.00 From Product C (500*60) 30,000.00 Total Contribution 88,000.00 4 The compnay is able to produce 310 units of Product B. But the demand for the same is 500. To produce the additional units the company can pay excess amout to the foreign vendor equal to the contribution margin per pound of the Product B i.e. 10. So the highest price per pound of additional material is = (8+10) = $18.

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