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

Answer 1

1. Contribution margin per pound of constraining resource

Sr. No.	Particulars	A	B	C
A	Contribution per unit $	36	72	36
B	Direct materials per unit $	18	72	27
C	Direct materials per unit (Pounds) (B/9)	2	8	3
D	Contribution margin per pound $	18	9	12

2. Maximum contribution in case of unlimited demand

The priority of usage of the constrained resource (direct material) is decided by the contribution per unit of the constrained resource. Thus, as calculated in row D of table above, the constrained resource will first be used for product A (contribution of $18 per pound), second for product C ($12) and third for product B ($9). Given the unlimited demand, the entire stock of direct materials will be used only for product A

The maximum contribution in this case will be $18 * 5400 pounds = $97,200

3. Maximum contribution in case of demand of 600 units per product

Following the same priority order as in question 2, the maximum contribution is calculated as below.

Sr. No.	Particulars	Quantity (Pounds)	Contribution ($)
A	Total availability	5400
B	First priority-Product A - 600 units * 2 pounds per unit	1200
C	Contribution - 1200 pounds * $18 per pound		21,600
D	Balance (A-B)	4200
E	Second priority - Product C - 600 units * 3 pounds per unit	1800
F	Contribution - 1800 pounds * $12 per pound		21,600
G	Balance (D-E)	2400
H	Third priority - Product B - 600 units * 8 pounds	4800
I	Since actual requirement is higher than availability, max. production possible is 300 units (2400/ 8 pounds per unit)	2400
J	Contribution - 2400 pounds * $9 per pound		21,600
K	Total contribution (C+F+J)		64,800

4. Maximum price for additional material

The maximum price that the Company will be willing to pay for the material will be the price at which its contribution is zero. As seen in table above, the unsatisfied demand is only for product B, where the contribution per pound of the material is $9. Since the original cost of the material is $9 per pound, the maximum price it can pay for additional material is 9+9= $ 18