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 A. $150 12 120 240 $200 Selling price Variable expenses: Direct materials 1088158 Other variable expenses Total variable expenses Contribution margin 120 168 140 42 $ 30 72 20% 30% 21% 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 $6 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.

based on contribution per pound of rawmaterial product giving highest contribution is ranked first.

2. if each product has unlimited demand, rawmaterial is used for the product giving highest contribution. in this case product A is giving highest contribution per pound of raw material and raw material is used for product A.

3.

4. only product B is short of rawmaterial quantity of 2400 pounds to satisfy its annual demand.

firm can offer the contribution it can earn to purchase raw material. so the highest amount it can offer is the contribution it can earn per pound of raw material which is = 9

A B C Selling price 150 240 200 Variable costs: Direct material 12 48 18 other 108 120 140 Total variable costs 120 168 158 Contribution per unit 30 72 42 Pound of rawmaterial per unit 2 8 3 Contribution per pound 15.00 9.00 14.00 Ranking 1 3 2

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