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	$	210			$	320			$	240
Variable expenses:
Direct materials		16				64				24
Other variable expenses		110				96				132
Total variable expenses		126				160				156
Contribution margin	$	84			$	160			$	84
Contribution margin ratio		40	%			50	%			35	%

  

The same raw material is used in all three products. Barlow Company has only 5,700 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 $8 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 order 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.

Product A	Product B	Product C
Contribution Per Unit = 84	Contribution Per Unit= 160	Contribution Per Unit = 84
RM Per Unit = 16/8 = 2	RM Per Unit = 64/8 = 8	RM Per Unit = 24/8= 3
Contribution per Pound RM= 84/2= 42	Contribution per Pound RM = 160/8 = 20	Contribution per Pound RM = 84/3 =28

2.(a) Contribution margin

Product A = Sales -variable cost = 210-126 = 84

Product B =Sales -variable cost = 320-160 = 160.

Product C =Sales -variable cost = 240-156 = 84

2.(b) Order should be

1. Product A

2. Product C

3. Product B

( Ranked on the basis of contribution margin per pound of Raw material)