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: Selling price $200 $250 $220 Variable expenses Direct materials 3280 108 40 125 Other variable expenses Total variable expenses Contribution margin Contribution margin ratio 70 150 $ 60 $100 $55 140 165 30% 40% 25% The same raw material is used in all three products. Barlow Company has only 5,300 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 co centrate on next week in filing its backlog of orders. The material costs $8 per pound. Required: 1. Compute the amount of contribution margin that will be obtained per pound of material used in each Contribution margin per unit Direct material cost per unit Direct material cost per pound Pounds of material required per unit Contribution margin per pound 2a. Compute the amount of contribution margin on each product

Explanation / Answer

1 A B C 1 Contribution margin per unit $        60 $      100 $        55 2 Direct material cost per unit $        32 $        80 $        40 3 Direct material cost per pound $           8 $           8 $          8 4 Pound of material required per unit (2 / 3) 4 10 5 5 Contribution Margin Per Pound (1 / 4) $        15 $        10 $        11 2a. The Company should concentrate its available material on product A: A B C 1 Contribution margin per pound (above) $           15 $           10 $          11 2 Pounds of material available 5,300 5,300 5,300 Total Contribution Margin ( 1 X 2) $ 79,500 $ 53,000 $ 58,300 2b. Product A, It has the lowest contribution margin per unit and the second lowest Contribution margin ratio, It is preferred over other two products. since it has the greatest amount of contribution margin per pound of material, and material is the company's constrained resource. 3 The price of Barlow company willing to pay per pound for additional raw material depends on how the material would be used. If there are unfilled for all the products, Barlow would presumably use the additional material to make more of product A.Each pound of raw material used in Product A generates $ 15 of contribution margin over and above the usual cost of raw materials. Therefore Barlow is willing to pay $ 23 per pound ( $ 8 usual price plus $ 15 Contribution margin per pound) for additional raw material, but would of course prefer pay less.The upper limit of $ 23 per pound to manufacture more product A Signals to managers how valuable additional raw material are to the company. If all the orders of Product A have been filled, Barlow would then use the additional material to manufacture product C. Barlow is willing to pay $ 19 per pound ( $ 8 usual price plus $ 11 Contribution margin per pound) for additional raw material to manufacture more product C, and up to $ 18 per pound ( $ 8 usual price plus $ 10 Contribution margin per pound) for additional raw material to manufacture more product of B if all of the orders of product C have been filled.

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