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 B $ 240 $ 180 $ 220 Selling price Variable expenses: Direct materials Other variable expenses Total variable expenses Contribution margin Contribution margin ratio 18 126 144 72 96 168 30 140 170 $ 50 $ 36 $ 72 208 30% 238 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Calculate the contribution margin per pound of the constraining resource for each product. A B C Contribution margin per pound of the constrained resource

Answer 1

Requirement 1:-

Particulars	Product A	Product B	Product C
Direct Materials Cost	18	72	30
Cost per direct material	6	6	6
No.of direct materials	3	12	5
Selling Price	180	240	220
Less:- Variable costs	144	168	170
Contribution Margin	36	72	50
Pounds of raw materials used	3	12	5
Contribution Margin per pound	12	6	10

Requirement 2:-

Based on the question, if it is assumed, that there is unlimited demand for each product, the maximum contribution margin is arrived by selling more units of Product A as it has the highest contribution margin per constrained resource.

Hence, the maximum contribution margin = 5,400 pounds * $12 per pound = $64,800

Requirement 3:-

When demand per product line is 600 units, the order of assignment would be the one with the best contribution margin per pound, second best contribution margin per pound and so on.

Hence, the maximum contribution margin is :-

Product	Units	No.of pounds per unit	Total no. of pounds	Contribution margin per pound	Total Contribution margin(no.of pounds * Contribution margin per pound)
A	600	3	1,800	12	21,600
C	600	5	3,000	10	30,000
B	50	12	600	6	3,600
				Total	55,200

Requirement 4:-

The maximum allowed price that Barlow should accept is calculated as follows:-

Since demand for A and C is satisfied with the amount of resources available on hand, the only remaining product will be product B. The price that Barlow can afford for Product B is :-

=Current cost of raw material per pound + Contribution Margin per pound for Product B

=$6 + $6

=$12

Maximum price that Barlow can afford = $12

Please let me know if you have any questions via comments. All the best and have a nice day :) !