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			$	270			$	240
Variable expenses:
Direct materials		24				72				32
Other variable expenses		102				90				148
Total variable expenses		126				162				180
Contribution margin	$	54			$	108			$	60
Contribution margin ratio		30	%			40	%			25	%

The same raw material is used in all three products. Barlow Company has only 5,000 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.

1. Compute the amount of contribution margin that will be obtained per pound of material used in each product.

	A	B	C
Contribution margin per unit	$54	$108	$60
Direct material cost per unit	$24	$72	$32
Direct material cost per pound	$8	$8	$8
Pounds of material required per unit	3	9	4
Contribution margin per pound

2. Compute the amount of contribution margin on each product.

Contribution margin per pound	$18	$12	$15
Pounds of material available	5,000	5,000	5,000
Total contribution margin	$90,000	$60,000	$75,000

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?

Maximum amount

per pound

Answer 1