3. Assuming that Barlow’s estimated customer demand is 600 units per product lin

Question

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 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 600 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?

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 $150 240 S 230 36 12140 Selling price Variable expenses: Direct materials 12 48 10820 168 Other variable expenses 176 $ 30 $ 72 $ 54 23 120 Total variable expenses Contribution margin Contribution margin ratio 20% 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 filling its backlog of orders. The material costs $6 per pound

Explanation / Answer

ANSWER =1 PEODUCTS A B C Selling price $150.00 $240.00 $230.00 Less: Variable Expenses Direct Material $12.00 $48.00 $36.00 Other Variable Expenses $108.00 $120.00 $140.00 Total Variable Expenses $120.00 $168.00 $176.00 Contribution Margin (A) $30.00 $72.00 $54.00 Material Used (in Pounds)(B)                              2.00                                       8.00                                       6.00 ($ 12 / $ 6) ($ 48 / $ 6) ($ 36 / $ 6) Contribution per Pounds (A/ B) $15.00 $9.00 $9.00 Ranking of the Products on the basis of Contribution per pound of material 1 St 2 nd 2 nd CACLULATION OF PRODUCTION SCHEDULE AS PER CONBTIBUTION MARGIN PER POUNDS Units Per units Used Total Units Available Units Balance Units Product A 600 2 1200 5400 4200 Product B                               525 $                                  8.00 4200 4200 0 CALCULATION OF CONTRIBUTION MARGIN WITH PRODUCE OF LIMITED QUANTITY OF 5400 POUND AND THE OTHER ONE WITH NO LIMITATION OF MATERIAL AVAILABILITY Material Availa only 5400 units Matarial available for whole demand Contribution per units from Product A 9000 9000 (Units demand X Contribution margin per pound) (600 units * 15) (600 units * 15) Contribution per units from Product B 4725 5400 (525 units * 9) (600 units * 9) Contribution per units from Product C 0 5400 (600 units * 9) Total Contribtion 13725 19800 Additional Contribtion from whole demanad = $6,075 Total Demand of Material in Pound = Pounds Product A (600 X 2 pounds) 1200 Product B (600 X 9 pounds) 5400 Product C (600 X 9 pounds) 5400 12000 Available Material = 5400 Additional Material Required = 6600 Additional Price per unit Payable = Additional Contribution / additional Units Additional Price per unit Payable = $ 6,075 / $ 6,600 = $ .92 Per unit So, Maximum price payable per units= Current price + additional Price So, Maximum price payable per units= $ 6 + $ 0.92 = $ 6.92

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