Question

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

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 5,100 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. 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?

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

 1 A B C A Contribution margin per unit 30.00 72.00 30.00 Direct material cost per unit 12.00 48.00 18.00 Direct material cost per pound 6.00 6.00 6.00 B Pounds of material required per unit 2.00 8.00 3.00 (Cost/Per Pound Cost) A/B Contribution margin per pound 15.00 9.00 10.00 2A A B C A Contribution margin per pound 15.00 9.00 10.00 B Pounds of material available 5,100 5,100 5,100 A*B Total contribution margin 76,500 45,900 51,000 2B Product A Since it is giving max contribution 3 Normal Price Per Pound 6.00 Add: Max Contribution Per Pound 15.00 Maximum Price Per Pound 21.00

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