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: Α $ 180 Product в $ 300 с $ 240 18 90 27 Selling price Variable expenses: Direct materials Other variable expenses Total variable expenses Contribution margin 126 144 120 210 $ 90 177 204 $36 $ 36 20% 30% 15% Contribution margin ratio The same raw material is used in all three products. Barlow Company has only 6,300 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 6,300 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 6,300 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 6,300 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?

Answer 1

1	Particulars	A	B	C
	Direct material cost	18	90	27
	Direct material pounds/unit	2	10	3
	Contribution	36	90	36
	Contribution margin per pound	18	9	12
2	Assuming, company has unlimited demand for all the products, Company will produce only product A since its contibution/pound is higher of the rest
	Maximum production of product A = 6,300/2 = 2,100 units
	Maximum contribution to company = 2,100 *36 = 75,600
3	Production
	Particulars	A	B	C
	Contribution margin per pound	18	9	12
	Rank	I	III	II
	Maximum demand	600	600	600
	Raw material pounds required to produce to meet maximum demand	1,200	6,000	1,800
	Allocation of raw material	1,200	3,300	1,800
	Units to produce to get max profit	600	330	600
	Contribution margin per unit	36	90	36
	Total contribution	21,600	29,700	21,600
4	Particulars	A	B	C
	Maximum demand	600	600	600
	Units that can be produced with available raw materials	600	330	600
	Balance	-	270	-
	Raw materials required to produce additional units	-	2,700	-
	Extra contribution earned on producing additional units = 270* 90
			= 24,300
	Maximum price that barlow could pay to foreign supplier = 24,300/2700
			= 9/pound