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 \$ 190 \$ 270 \$ 240 Variable expenses: Direct materials 18 54 24 Other variable expenses 115 108 156 Total variable expenses 133 162 180 Contribution margin \$ 57 \$ 108 \$ 60 Contribution margin ratio 30 % 40 % 25 %

 The same raw material is used in all three products. Barlow Company has only 5,500 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?

 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?

 1 A B C Contribution margin per unit 57 108 60 Direct materials cost per unit(1) 18 54 24 Direct materials price per pound(2) 6 6 6 Pounds of material required per unit (1) ÷ (2) 3 9 4 Contribution margin per pound of material 19 12 15 2 a A B C Contribution margin per pound of material 19 12 15 X Pounds of raw material available 5500 5500 5500 Total contribution margin 104500 66000 82500 b Product A, as it provides highest contribution margin 3 Highest price = Normal price+Contribution margin per pound Highest price = 6+19 = \$25 per pound

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