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
	A				B				C
Selling price	$	180			$	270			$	240
Variable expenses:
Direct materials		24				80				32
Other variable expenses		102				90				148
Total variable expenses		126				170				180
Contribution margin	$	54			$	100			$	60
Contribution margin ratio		30	%			37	%			25	%

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

Product
	A	B	C
Selling price	180	270	240
Variable expenses:
Direct materials	24	80	32
Other variable expenses	102	90	148
Total variable expenses	126	170	180
Contribution margin C	54	100	60
No. of pounds of material used P	3	10	4
	24/8	80/8	32/8
Contribution margin per pound C/P	18	10	15	ans 1
Ans 2
When products demamd is unlimites
Maximum contribution margin that can be earned is by selling product A
6000*$18	108000	ans
Ans 3
Maximum contribution margin that can be earned
Product A 500 units*3*18	27000
pounds left (6000-(500*3))=4500
Product C (500*4*15)	30000
pounds left (4500-(500*4))=2500
Product B (250 units*10*10)	25000
Maximum contribution margin
Product A	27000
Product B	30000
Product C	25000
Total	82000
ans 4
Product A and Product B demand is completely utilised by
own stock for Product C more pound are needed so maximum
price that could be paid is $10 for additional raw material. It is
the contribution margin per pound for Product C

If any doubt please comment