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

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, whot 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

3.

	Product
	A	B	C
Direct Material cost per unit	$   18.00	$ 72.00	$ 30.00
Material Cost per pound	$     6.00	$     6.00	$    6.00
Pound of material per unit	3	12	5
Estimated sales demand	600	600	600
Material required (Pounds)	1800	7200	3000
Contribution Margin Per unit	$   36.00	$ 72.00	$ 50.00
Contribution Margin Per pound	$   12.00	$     6.00	$ 10.00
Rank	1	3	2

Rank has been assigned on the basis of higher contribution margin per pound of raw material.
Accordingly company will produce Product A first, then B and then C
Company can produce A & C in full will given raw material of 5400 pounds but can produce only but can only utilise 600 pounds i.e. (5400-1800-3000) for Product B

Therefore Maximum Contribution is
Product A = 1800 x $12 = $21600
Product B = 3000 x $10 = $30000
Product C = 600 x $6 = $ 3600
Total Contribution = $55200

4. As company has 600 units of demand for all products then company should purchase from outside at the minimum rate as per the lowest contribution margin per pound calculation.Product B has the lowest contribution margin per pound. he contribution margin per pound for Product B is $6 per pound . Therefore the maximum price that the company should pay for materials is minimum contribution margin per pound over present rate i.e $6 + $6 = $12
Moreover 5400 pounds of raw material is fulfiling demand for Product A & product C, only required for Product B, Since Contribution Margin per raw material pound is $6, if company Purchases above $12, it will lead to losses