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 $150 $240 S2ee Selling price Variable expenses: Direct materials Other variable expenses Total variable expenses Contribution margin 128 120 $ 30 129 168 Contribution margin ratio 20% 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 plent 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

Product C Product A Product B $12 $48 Direct material cost $18 Selling prices Total variable expenses Contribution margin Pounds of raw materials per unit Contribution margin per pound $150 $120 $30 2 $15 $240 $168 $72 8 $0 $200 --> (a) $158 --> (b) $42 --> (c) = (a) - (b) 3 --> (d) = $12/$6=2; $48/$6=8; $18/$6=3] $14 -->(c)/(d) 2) If it is assumed that there are unlimited demands for each product, firm must utilize the scarced resource of pounds to satisfy demand for Product A only because it yields the highest contribution margin per pound among the three. Pounds of materials available on hand Contribution margin per pound-Product A Maximum possible contribution margin 5,400 $15 [As calculated above] $81,000 [5400 pounds x $15]

3) When demand for each product is only 600 units only, scarced resource shall be utilized to satisfy demand for Product-A fully first, Product-C fully next and then if balance is available, it must be used to satisfy demand for Prod-B. as Product-B yields the least contribution margin per pound. Pounds of materials required to satisfy demand for Product-A Pounds of materials required to satisfy demand for Product-C Pounds of materials required to satisfy demand for Product-B 1,200 1,800 2,400 [600 units x 2 pounds] [600 units x 3 pounds] [5400 - 1200 - 1800] Therefore, Maximum contribution margin that can be earned is $64,800_[(1200 x $15) + (1800 x $14) + (2400 x $9)] 4) As demand for Product-B alone is pending to satisfy, maximum price per pound of material that can be offerred shall be sum of currrent price per pound and contribution margin per pound of Product-B. That is, Current price per pound of material Add: Contribution margin per pound of Product B The highest price per pound that can be paid [Given] [As calculated in Part-1] $6 $9 $15 ($6 + $9)