Question

Barlow Company manufactures three products—A, B, and C. The selling price, variable costs, and contribution margin...

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 \$ 150 \$ 240 \$ 200 Variable expenses: Direct materials 12 48 18 Other variable expenses 108 120 152 Total variable expenses 120 168 170 Contribution margin \$ 30 \$ 72 \$ 30 Contribution margin ratio 20 % 30 % 15 %

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?

1) Contribution margin per pound

 Product A Product B Product C Contribution margin per unit 30 72 30 Pound per unit 2 8 3 Contribution margin per pound 15 9 10

2) Maximum contribution margin = 5400*15 = 81000

3) Calculate maximum contribution margin

 Pound Unit Contribution margin Product A 600*2 = 1200 600 600*30 = 18000 Product C 600*3 = 1800 600 600*30 = 18000 Product B 2400 2400/8 = 300 300*72 = 21600 Total 5400 57600

4) Maximum price = 6+9 = 15 per pound

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