Question

milings Review View Add-ins Help Tell me what you want to do 1 2 AaBbccdd AaBbccbd AaBb 1 Normal 1 No Spac... Heading 1 AaBbccc AaB A Heading 2 Title Paragraph Styles 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 $270 $240 Selling price $180 variable expenses: Direct materials 24 other variable expenses 102 Total variable expenses 126 Contribution margin $ 54 Contribution margin ratio 309 90 170 $100 180 The same raw material is used in all three products. Barlow Company has only 6.000 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 6.000 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 eam when using the 6.000 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 6.000 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

1.

	Product
	A	B	C
Contribution margin per unit $	54	100	60
Material (pounds) required per unit	3	10	4
	($24/8)	($80/8)	($32/8)
Contribution margin per pound of the constraining resource $	18	10	15
	($54/3)	($100/10)	($60/4)

2.

	Product
	A
Material (pounds) required per unit	3
Units produced using constrained resource (6000/3)	2000
Contribution margin per unit $	18
Maximum contribution margin $ (2000 x $18)	36000

Since there is unlimited demand for each of the three products, the entire constrained resource will be used for the product that has the highest contribution margin per pound of the constrained resource which is Product A.

3.

	Product			Total
	A	B	C
Ranking based on contribution margin per pound	I	III	II
Material (pounds) required per unit	3	10	4
Units produced using constrained resource	500	250	500
Material (pounds) used	1500	2500	2000	6000
		(Remaining pounds)
Contribution margin per unit $	54	100	60
Maximum contribution margin $	27000	25000	30000	82000

The maximum demand of products A and C will be fulfilled first and then the remaining constrained resource will be used for product B.

4. Highest price willing to pay per pound: $18

Regular direct material cost per pound $	8.00
Contribution margin per pound of raw material-Product B	10.00
Maximum price to be paid per pound $	18.00

Since the company has satisfied the demand for products A and C, the additional materials purchased would be used for product B, hence contribution margin per pound of material for product B is considered in computing the maximum price to be paid per pound of additional materials.