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
	A				B				C
Selling price	$	210			$	330			$	320
Variable expenses:
Direct materials		21				63				28
Other variable expenses		147				168				244
Total variable expenses		168				231				272
Contribution margin	$	42			$	99			$	48
Contribution margin ratio		20	%			30	%			15	%

The same raw material is used in all three products. Barlow Company has only 5,200 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 $7 per pound.

Required:

1. Compute the amount of contribution margin that will be obtained per pound of material used in each product.

	A	B	C
Contribution margin per unit
Direct material cost per unit
Direct material cost per pound
Pounds of material required per unit
Contribution margin per pound

2a. Compute the amount of contribution margin on each product.

	A	B	C
Contribution Margin per pound	_______	_______	______
Pounds of material available
Total Contribution Margin

2b. Which orders would you recommend that the company work on next week—the orders for product A, product B, or product C?

	Product A
	Product B
	Product C

3. A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials?

Maximum amount

per pound

Answer 1

1
	A	B	C
Contribution margin per unit	42	99	48
Direct material cost per unit	21	63	28
Direct material cost per pound	7	7	7
Pounds of material required per unit	3	9	4
Contribution margin per pound	14	11	12
2a
	A	B	C
Contribution Margin per pound	14	11	12
Pounds of material available	5200	5200	5200
Total Contribution Margin	72800	57200	62400
2b
Product A
3
Maximum amount = 7+14 = $21 per pound