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	$	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?

     

Answer 1

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