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:

  

Product

360

  

The same raw material is used in all three products. Barlow Company has only 4,200 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.

  

Compute the amount of contribution margin that will be obtained per pound of material used in each product.

0

Compute the amount of contribution margin on each product

Which orders would you recommend that the company work on next week—the orders for product A, product B, or product C?

Product C

A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials?

Product

A B C   Selling price $ 270 $

360

$ 340   Variable expenses:     Direct materials 36 72 42     Other variable expenses 126 108 179   Total variable expenses 162 180 221   Contribution margin $ 108 $ 180 $ 119   Contribution margin ratio 40 % 50 % 35 %

Explanation / Answer

1 A B C Contribution margin per unit 108 180 119 Direct material cost per unit 36 72 42 Direct material cost per pound 6 6 6 Pounds of material required per unit 6 12 7 Contribution margin per pound 18 15 17 2 A B C Contribution margin per pound 18 15 17 Pounds of material available 4200 4200 4200 Total contribution margin 75600 63000 71400 b Product A 1 Product B 3 Product C 2 3 Maximum amount = 6+18 = $24 per pound

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