Barlow Company manufactures three products-A, B, and C. The selling price, varia
ID: 2589521 • Letter: B
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 Selling price Variable expenses: $180 $240 $ 240 Direct materials 18 126 27 Other variable expenses Total variable expenses Contribution margin 144177 $ 36 $ 72 $ 36 204 20% 30% 15% Contribution margin ratio 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 $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 5,400 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 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?Explanation / Answer
1
Calculation of contribution margin per pound of constraining resource for each product
PRODUCT
A
PRODUCT
B
PRODUCT
C
Direct Materials
(A)
18
72
27
Material cost per pound
(B)
9
9
9
Pound required per unit of product
(C) = (A)/(B)
2
8
3
Contribution per unit
(D)
36
72
36
Contribution per pound of
direct material
(E) = (D)/(C)
18
9
12
Rank
1
3
2
2
Calculation of maximum contribution company can earn in case of unlimited demand:
Since, maximum contribution per pound is earned by Product A, as given in point 1,
company can earn maximum contribution by producing maximum units of Product A.
Product A
Total Raw Material in pounds
(A)
5400
Pound required per unit of product
(B)
2
Units that can be produced
(C) = (A) / (B)
2700
Contribution per unit
(D)
36
Maximum contribution margin
(E) = (C) * (D)
97200
3
Calculation of maximum contribution in case of limited demand
Company will utilize its product in a sequence of Ranking calculated in point 1 to earn
maximum contribution.
Product
A
Product
B
Product
C
Ranks
1
3
2
Units of first preference
(A)
600
Pound used per unit
(B)
2
Pounds consumed
(C) = (A) * (B)
1200
Material left
(D) = 5400 - (C)
4200
Units of second preference
(E)
600
Pound used per unit
(F)
3
Pounds consumed
(G) = (E) * (F)
1800
Material left
(H) = 4200 - (G)
2400
Pound used per unit
(I)
8
Units of third preference
(J) = (H)/(I)
300
Units to be produced
(K) = from (A),
(E) and (J)
600
300
600
Contribution per unit
(L)
36
72
36
Maximum Contribution margin
(M) = (K) * (L)
21600
21600
21600
Total Contribution margin
64800
4
Calculation of maximum price of raw material that can be paid
Product
A
Product
B
Product
C
Optimal Production at current
level of 5400 pounds raw material
(A)
600
300
600
(Taken from point 3)
Maximum Demand
(B)
600
600
600
Demand not met with current level
(C) = (B) - (A)
0
300
0
Contribution per unit
(D)
72
Pound required per unit of product
(E)
8
Contribution per pound
(F) = (D)/(E)
9
Existing price per pound
(G)
9
Total price that can be paid to
foreign supplier for each pound
(H) = (F) + (G)
18
1
Calculation of contribution margin per pound of constraining resource for each product
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