Question

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

Answer:

They should not pay any more than the original price plus the contribution margin.

Explanation:

Since there's already unfilled demand for the products, paying extra in the form of contribution margin is not much. But any additional costs over the original cost price plus added contribution margin should not be accepted as this will greatly increase the cost of the product thereby making the sale of extra units of the three products unprofitable. Barrow company purchase price ceiling should be at initial cost plus contribution margin.