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.
|
2a. Compute the amount of contribution margin on each product.
|
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?
|
| 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 | ||||
Get Answers For Free
Most questions answered within 1 hours.