Exercise 12-8 Volume Trade-Off Decisions [LO12-5, L012-6] Barlow Company manufac

Question

Exercise 12-8 Volume Trade-Off Decisions [LO12-5, L012-6] 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 Variable expenses: $180 $300 240 Direct materials 27 18 126 90 120 Other variable expenses Total variable expenses Contribution margin 1440_177 S 36 90 36 2104 204 20% 30% 15% Contribution margin ratio The same raw material is used in all three products. Barlow Company has only 6,300 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 concentrate on next week in filling its backlog of orders. The material costs $9 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 6,300 pounds of raw material on hand? 3. Assuming that Barlow's estimated customer demand is 600 units per product line, what is the maximum contribution margin the company can earn when using the 6,300 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 600 units per product line and that the company has used its 6,300 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

Requirement - 1

Requirement - 2

When there is unlimited demand ( i.e what ever is produced can be sold) then all the resources shall be diverted to use for PRODUCT - A with highest contribution of 18 per pound of material used.

Maximum contribution = 6300 pounds * 18 = 113400...........................is the final answer

Requirement - 3

For demand at 600 units per product. we need 600 * 2 = 1200 pounds in first instance for product - A. After that we will be having 6300 - 1200 = 5100 pounds.

Product - c shall be considered at this stage, which requires 600 units * 3 pounds = 1800 pounds.

Now 5100 - 1800 = 3300 pounds of material will be available for production of Product - B. With that we can produce a maximum quantity of 3300/10 = 330 units only.

Requirement - 4

If additional raw material is purchased, it had to be used for product - B. Because, we have already meet the demands of A and C.

So .........Maximum price = 9 per pound ( current price) + 9 per pound ( contribution per pound)

= $ 18 .......................final answer

A B C Contribution margin ( given) 36 90 36 Material required ( in pounds) 2 10 3 pounds = 18/9 , 90/9 and 27/9 Contribution per pound 18 9 12

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