Question

Chapter 12 Ex 5

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	$	150			$	240			$	200
Variable expenses:
Direct materials		12				48				18
Other variable expenses		108				120				140
Total variable expenses		120				168				158
Contribution margin	$	30			$	72			$	42
Contribution margin ratio		20	%			30	%			21	%

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, 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

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Solution: Particulars Direct Material cost per unit Direct Material cost per pound Direct Material per unit in pounts Contribution Margin per unit 12 30 72 42 1) Contribution Margin per pound (CM/DM per pound) 15 9 $ 14 Rank: 2 Maximum Contribution Margin at unlimited demand (5400 15) $ 81,000 3) Contribution Margin at 600 demand: Total Unit in demand Direct Material requirement in pounds Pound required Allocation of Direct Material per Rank (2400 plugged) Contribution Margin per pound Maximum Contribution Margin at 600 demand 1200 1200 $ 15 S$ 1800 1800 9 $14 2400 $18,000 $21,600 $ 25,200 64,800 4) Highest price should be paid for an additional pound of materials (Cost per pound Equal to contribution margin per pound of remaining product B) 15