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 Selling price Variable expenses: $180 $270 240 Direct materials 24 102 126 80 90 170 32 Other variable expenses Total variable expenses Contribution margin 148 100 $ 54 $100 60 30% 37% 25% Contribution margin ratio The same raw material is used in all three products. Barlow Company has only 6,600 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 $8 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 6,600 pounds of raw material on hand? 3. Assuming that Barlow's estimated customer demand is 500 units per product line, what is the maximum contribution margin the company can earn when using the 6,600 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 500 units per product line and that the company has used its 6,600 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

Req 1: Contribution margin per pound of raw material
				Prodduct A	Product B	Product C
Contribution margin per unit				54	100	60
Divide: Number of pounds per unit of output				3	10	4
Contribution margin per pound				18	10	15
Ranking				I	III	II
Req 2:
				Prodduct A	Product B	Product C
Contribution margin per unit				54	100	60
Divide: Number of pounds per unit of output				3	10	4
Contribution margin per pound				18	10	15
Ranking				I	III	II
With Unlimited demand, The company must produce Product-A.
Therefore, number of units that cane be produced (6600/3):2200 units
Contributon earned: 2200 units @ 54 = $118,800
Req 3:
Maximum raw amterial available				6600
Less: Used in Product A (500 units @3)				1500
Remaining				5100
Less: Used in Product C (500*4)				2000
Remaining Used in Product B				3100
raw material pound per unit of Product B				10
Number of Units of Product B				310 units
				Product A	Product B	Product C	Total
Number of units to be produced				500	310	500
Contributin per unit				54	100	60
Total ontribution				27000	31000	30000	88000
Req 4:
With additional units of raw material, Product B will be produced.
Thereffore, the company wil be willing to Pay $18 per pound (i.e. $ 8 + $10 of contribution margin per pound of Product B)