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 $ 150 $ 240 $ 200

Variable expenses:

Direct materials 12 48 18

Other variable expenses 108 120 140

Total variable expenses 120 168 158

Contribution margin $ 30 $ 72 $ 42

Contribution margin ratio 20 % 30 % 21 %



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. The contribution margin per pound of the constraining resource for each product is:

Product                                            A          B           C

Contribution margin per pound $15       $9         $14

2. Assuming that Barlow has unlimited demand for each of its three products, the maximum contribution margin it can earn using the 5,400 pounds is $81,000.

3. Assuming that Barlow’s estimated customer demand is 600 units per product line, the maximum contribution margin the company can earn when using the 5,400 pounds is $64,800.

4. The highest price Barlow Company should be willing to pay for an additional pound of materials is $15 ($6 + $9).

Data and Calculations:

Available raw materials = 5,400 pounds

Material cost per pound = $6

Contribution margin per pound

Product                                            A            B           C

Selling price                                $ 150   $ 240    $ 200

Variable expenses:

Direct materials                               12         48           18

Other variable expenses             108        120         140

Total variable expenses              120        168         158

Contribution margin                   $ 30      $ 72       $ 42

Contribution margin ratio           20%     30 %       21 %

Materials per unit                           2          8            3 ($18/$6)

Contribution margin per pound $15       $9         $14 ($42/3)

Maximum contribution = $81,000 ($15 x 5,400)

Total contribution based on maximum demand of 600 units of each product:

Product                                          A             B           C

Maximum demand                     600         600       600

Materials per unit                           2              8            3

Total materials required         1,200          4,800    1,800

Materials allocation                 1,200         2,400        1,800

Contribution margin per pound $15       $9         $14  

Total contribution                    $18,000   $21,600   $25,200 = $64,800        

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