Question

Exercise 12-8 Volume Trade-Off Decisions [LO12-5, LO12-6] Barlow Company manufactures three products-A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow: A $ 180 Product B $ 300 C $ 240 Selling price Variable expenses: Direct materials Other variable expenses Total variable expenses Contribution margin 18 126 144 90 120 210 $ 90 30% 36 20% 177 204 $ 36 15% Contribution margin ratio The same raw material is used in all three products. Barlow Company has only 6,300 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) concentrate on next week in filling its backlog of orders. The material costs $9 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 6,300 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 6,300 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 6,300 pounds of rav 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 Required 1 Required 2 >

Answer 1

Solution Requirement 1: Contribution margin per pound of the constraining resource for each product A В C $36 Contribution margin per unit $36 $90 Direct material cost per unit $18 $90 $27 Direct material cost per pound Pounds of material required per unit Contribution margin per pound $9 $9 $9 10 2 $18 $9 $12 A В C Contribution margin per pound of the constrained resource $18 $9 $12 Requirement 2 : Compute the Maximum contribution margin the company can earn when using the 6,300 pounds of raw material on hand Product A's contribution margin per pound of material is highest in all the three products, and since there is unlimited demand for each of the products, the Company will make Product A to maximise the contribution margin А $18 Contribution margin per pound Pounds of material available Total contribution margin 6,300 $113,400 Maximum contribution margin $113,400 Requirement 3 : Maximum contribution margin the company can earn when using the 6,300 pounds of raw material on hand with maximum demand 600 units for each product line Total А В с Contribution margin per pound $18 $9 $12 Production ranking based on Contribution 3 2 margin Maximum demand for each product line Pounds of material required per unit 600 600 600 31 2 10 Pounds of Material required to produce maximum demand units for each product line 1200 6000 1800 Pounds of Material used in optimal 1200 3300 1800 manner Maximum contribution margin with 6,300 pounds of material $21,600 $21,600 $72,900 $29,700 Maximum contribution margin $72,900 Requirement 4: Highest price for an additional pound of materials With the 6,300 pounds of material, demand of Product A & product C is fully fulfilled, however the demand of product B is partially fulfilled. In calculating the maximum price per pound of additional material, contribution margin per pound of Product B shall be considered. The Company shall be willing to pay maximum additional premium over existing cost of per pound of material to the foreign supplier equal to the contribution margin per pound from product B Cost per pound of material $9 Contribution margin per pound of Product B $9 Maximum price per pound $18 Highest price willing to pay per pound $18