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:

Product A B C Selling price $ 180 $ 240 $ 220 Variable expenses: Direct materials 18 72 30 Other variable expenses 126 96 140 Total variable expenses 144 168 170 Contribution margin $ 36 $ 72 $ 50 Contribution margin ratio 20 % 30 % 23 %

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?

Answer 1

1) Contribution margin per pound

	A	B	C
Contribution margin	36	72	50
Pound per unit	3	12	5
Contribution margin per pound	12	6	10

2) Total Contribution margin = 5,400*33 = $178,200

3) Total Contribution margin

	Pound	Unit	Contribution margin
A	600*3 = 1800	600	1800*12 = 21600
C	600*5 = 3000	600	3000*10 = 30000
B	600	100	1200*6 = 7200
Total	5,400

Total Contribution margin = 58,800

4) Highest price = 6+6 = 12 per pound

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