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 AB $180 $240 $240 Selling price Variable expenses: Direct materials Other variable expenses Total variable expenses Contribution margin Contribution margin ratio 18 126 144 $ 36 20% 72 96 168 $ 72 30% 27 177 204 $ 36 15% 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?

Answer 1

1)

	A	B	C
Contribution margin per unit [A]	36	72	36
Pounds of direct material required per product [Direct material cost /material cost per pound] [B]	18/9= 2	72/9 = 8	27/9= 3
contribution per pound [A/B]	36/2 =$ 18 Per pound	72/8 =$ 9 per pound	36/3 =$ 12 per pound
Ranking	1	3	2

2)

Since Product A yields highest contribution per constraint resource ,therefore it should be produced to maximum.

	Product A
Available Pounds	5400
Number of units of product A that can be produced	5400 pounds /2 pounds per unit = 2700 units

Maximum contribution margin = Number of units of product A that can be produced * contribution per unit

                      = 2700 * 36

                     = $ 97200

3)

Product in sequence of ranking	Pounds used to produce maximum quantity(number of units * pounds requirement per unit)	Available pounds	Contribution margin
A	600 * 2 = 1200	5400-1200= 4200	600*36= 21600
C	600*3=1800	4200-1800= 2400	600*36=21600
B	2400/8=300 units	0	300*72= 21600
Total contribution margin			64800

4)

Since the production requirement of B is not completely met ,The maximum price to pay per pound is equals to contribution margin per pound from product B =$ 9 per pound