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 $180 $240 240 Selling price Variable expenses: 72 96 Direct materials 18 Other variable expenses Total variable expenses Contribution margin 144 $ 36 72 36 20% 30% 159 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.

2.

As Product A has the highest contrbution margin per pund at $18 the company can earn a maximum contribution of $97,200 (5,400 x $18).

3.

Maximum contribution that can be earned = $64,800.

Working:

4.

Since the company has metthe maximum demand for Products A and C , the material from the foreign supplier can be used for Product B. As the controbution margin per pound for Product B is $9 , this is the maximum price that can be paid by the company to the foreignsupplier .

Details Products A B C Selling price 180 240 240 Variable expenses:     Direct material 18 72 27     Direct variable expenses 126 96 177 Total variable epxenses 144 168 204 Contribution per unit 36 72 36 Cost per pound of raw material 9 9 9 Raw material qty. Per unit (Pounds) 2 8 3 Contribution per pound of raw material 18 9 12

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