Question

Exercise 10-8 Utilization of a Constrained Resource [LO10-5, LO10-6]

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				B				C
Selling price	$	300			$	400			$	300
Variable expenses:
Direct materials		36				90				45
Other variable expenses		144				110				150
Total variable expenses		180				200				195
Contribution margin	$	120			$	200			$	105
Contribution margin ratio		40	%			50	%			35	%

  

The same raw material is used in all three products. Barlow Company has only 4,500 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.	Compute the amount of contribution margin that will be obtained per pound of material used in each product.

     

	A	B	C
contribution margin per units
direct material cost p[[er units
Direct material cost per units
Pounds of material required per units
contribution margin per pound

  

2a.	Compute the amount of contribution margin on each product.

       

	A	B	C
Contribution margin per pound
Pounds of material availrable
Total contribution margin

2b.	Which order would you recommend that the company work on next week—the orders for product A, product B, or product C?
	Product A Product B Product C

  

3.	A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials?

     

Answer 1

1
	A	B	C
Contribution margin per unit	120	200	105
Direct material cost per unit	36	90	45
Direct material cost per pound	9	9	9
Pounds of material required per unit	4	10	5
Contribution margin per pound	30	20	21
2a
Contribution margin per pound	30	20	21
Pounds of material available	4500	4500	4500
Total contribution margin	135000	90000	94500
2b
The company would produce Product A as it has highest contribution margin per pound
3
Maximum amount = Materials cost per pound+ Contribution margin per pound Product A
Maximum amount = 9+30 = $39 per pound