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	$	180			$	240			$	220
Variable expenses:
Direct materials		18				72				30
Other variable expenses		126				96				140
Total variable expenses		144				168				170
Contribution margin	$	36			$	72			$	50
Contribution margin ratio		20	%			30	%			23	%

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?

Answer 1

1) Contribution margin per pound

	A	B	C
Contribution margin per unit	36	72	50
Pound per unit	3	12	5
Contribution margin per pound	12	6	10
Rank	1	3	2

2) Maximum contribution margin = 5400*12 = 64800

3) Maximum contribution margin

	Pound	Unit	Contribution margin
Product A	600*3 = 1800	600	1800*12 = 21600
Product C	600*5 = 3000	600	3000*10 = 30000
Product B	600	600/12 = 50	600*6 = 3600
Total	5400		55200

Maximum contribution margin = $55200

4) Highest price = 6+6 = 12 per pound