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: A $ 160 Product B $ 270 с $ 240 Selling price Variable expenses: Direct materials Other variable expenses Total variable expenses Contribution margin 16 108 124 80 90 32 148 180 170 $36 $ 100 $ 60 23% 37% 25% Contribution margin ratio The same raw material is used in all three products. Barlow Company has only 6,000 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 $8 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 6,000 pounds of raw material on hand? 3. Assuming that Barlow's estimated customer demand is 500 units per product line, what is the maximum contribution margin the company can earn when using the 6,000 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 500 units per product line and that the company has used its 6,000 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. Contribution margin per pound of constraining resource
	Pro A	Pro B	Pro C
Direct Material Cost	16	80	32
Cost 8/pound
Material Required/Product	2	10	4
Contribution	36	100	60
Contribution/Pound	18	10	15
Rank	1	3	2
2. Assuming unlimited demand and 6000 pounds raw materials
Company will produce only Product A as its contribution per material is highest.
So, Contribution Margin for Product A
Product A production
(6,000/2 Pounds)	3000	Units
Contribution	1,08,000
(3000 units * 36)
3.if 500 demand for each product
Required materials
	Pounds	Rank	Use of 6000 pounds	units Produced	Contribution/unit	Total Contribution
Product A
(500*2)	1000	1	1000	500	36	18000
Product B
(500*10)	5000	3	2000	200	100	20000
Product C
(500*4)	2000	2	2000	500	60	30000
Total	8000		5000			68000
Maximum Contribution Margin = $ 68,000
4. Highest price that company could pay is -
Company will sell Product B using this material
Sales Price	270
Less:
Variable Cost (Excluding Material)	90
	180
Contribution Excl. Raw Materials	180
Material Required/Unit	10	Units
Maximum Cost that company could pay	(180/10)	$ 18/pound