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 80 32
Other variable expenses 102 90 148
Total variable expenses 126 170 180
Contribution margin $ 54 $ 100 $ 60
Contribution margin ratio 30 % 37 % 25 %
The same raw material is used in all three products. Barlow Company has only 6,000 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.

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 6,000 pounds of raw material on hand?

3. Assuming that Barlow’s estimated customer demand is 500 units per product line, what is the maximum contribution margin the company can earn when using the 6,000 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 500 units per product line and that the company has used its 6,000 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

Answer:

Explanation:

For A:

SP = 180

Variable expenses:

DM 24

Other Variable expenses 102

Total Variable expenses = 102+24 = 126

Contribution margin = SP - Variable expenses = 180-126 = 54

Contribution margin per pound = 54/#pounds = 54/3 = $18/pound

*pounds = DM/material costs = 24/8 = 3 pounds

For B:

SP = 270

Variable expenses:

DM 80

Other Variable expenses 90

Total Variable expenses = 80+90= 170

Contribution margin = SP - Variable expenses = 270-170= 100

Contribution margin per pound = 54/#pounds = 100/10 = $8/pound

*pounds = DM/material costs = 80/8 = 10pounds

For C:

SP = 240

Variable expenses:

DM 32

Other Variable expenses 148

Total Variable expenses = 148+32= 180

Contribution margin = SP - Variable expenses = 240-180= 60

Contribution margin per pound = 54/#pounds = 60/4= $15/pound

*pounds = DM/material costs = 32/8 = 4pounds

2)  

Maximum contribution margin that can be earned is by selling product A

6000*$18 = $108000  

3)

Product A = 500 units*3*18 = 27000    

pounds left (6000-(500*3))=4500

   

Product C (500*4*15) = 30000    

pounds left (4500-(500*4))=2500

   

Product B (250 units*10*10) = 25000

Maximum contribution margin:

Product A 27000    

Product B 30000    

Product C 25000    

Total 82000

4)

Product A and Product B demand is completely utilised by  

own stock

For Product C more pounds are needed. That is why maximum  

price that can be paid is $10 for additional raw material, which is the contribution margin of product C.