Question

Product AB $230 $320 Selling price $280 Variable expenses: Direct materials Other variable expenses 12 172 48 176 18 220 Total variable expenses 184 238 224 $ 98 Contribution margin $ 48 Contribution margin ratio 20% 30% The same raw material is used in all three products. Barlow Company has only 5,900 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 products) to concentrate on next week in filling its backlog of orders. The material costs $6 per pound. Required: 1. Compute the amount of contribution margin that will be obtained per pound of material used in each product Contribution margin per unit Direct material cost per unit $ $ 46 12 $ $ 96 48 $ $ 42 18 Direct material cost per pound Pounds of material required per unit 2 83 23$ 12 $ 14 Contribution margin per pound $ 2a. Compute the amount of contribution margin on each product. $ $ $ Contribution margin per pound Pounds of material available 23 5.900 135,700 12 5,900 70,800 14 5.900 82,600 Total contribution margin $ $ $ 2b. Which order would you recommend that the company work on next week-the orders for product A product B, or product C? Product A Product B Product C 3. A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials? Maximum amount per pound

Answer 1

	A	B	C
Contribution Margin per Unit	46	96	42
Direct material cost per pound	12	48	18
Cost per Pound	6	6	6
Pounds of material per unit = Direct Material/Cost per pound	2	8	3
Contribution Margin per Pound	23	12	14
	A	B	C
Contribution Margin per Pound	23	12	14
Pounds Available	5900	5900	5900
Total contribution margin	135700	70800	82600
Product A, followed by C and then B
3.Maximum amount = Current cost + Contribution margin per pound of A
i.e. $6+23 = $29 per pound
As there is unfilled demand for all, A will be produced first