Barlow Company manufactures three products-A, B, and C. The selling price, varia

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 27 658204 72 96 168 variable expenses Other Total variable expenses Contribution margin Contribution margin ratio S 36 $ 72 36 20% 303 15% 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? . 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

Products 1 A B C Sales 180 240 240 Less : Variable expenses Direct Material 18 72 27 Other variable expenses 126 96 177 Total Variable cost 144 168 204 Contribution Margin 36 72 36 No. of pound used as material 2 8 3 Contribution per pound of material 18 9 12 Ranking      I III     II Manufacture possible with 5400 pounds of material 2700 0 0 Maximum Contirbution that company can earn is 2700 units of Product A A Units Per unit 2700 Sales 180 486000 Less : Variable expenses Direct Material 18 48600 Other variable expenses 126 340200 Total Variable cost 144 388800 Contribution Margin 36 97200 2 Products A B C Sales 180 240 240 Less : Variable expenses Direct Material 18 72 27 Other variable expenses 126 96 177 Total Variable cost 144 168 204 Contribution Margin 36 72 36 No. of pound used as material 2 8 3 Contribution per pound of material 18 9 12 Ranking      I III     II Manufacture possible with 5400 pounds of material 600 300 600 Pounds of material used 1200 2400 1800 Maximum Contribution when maximum demand is 600 units per product line Products A B C Sales units 600 300 600 Sales 180 108000 240 72000 240 144000 Less : Variable expenses Direct Material 18 10800 72 21600 27 16200 Other variable expenses 126 75600 96 28800 177 106200 Total Variable cost 144 86400 168 50400 204 122400 Contribution Margin 36 21600 72 21600 36 21600 Highest price company should wiling to pay for an additional pound of materials are the additional contribution earned by selling 300 units of product B(unfulfilled customer demand) without material cost So, its $43200 for total materials or $18 per pound Sales 300 Less : Variable expenses 240 72000 Other variable expenses 96 28800 Contribution Margin 144 43200 Material require in pounds 2400 Highest price per pound 18 Reason for this is any price paid greater than above price will results in decrease in contribution.

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