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.

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 orders 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			Product A	Product B	Product C
		Selling Price	180	270	240		DM	24	72	32
		Less:					DM Cost PU	8	8	8
		Total Variable Cost	126	162	180		Direct Material Per Unit in Pounds	3.00	9.00	4.00
		Contribution Margin	54	108	60
		Direct Material Per Unit in Pounds	3	9	4
		Contribution Margin Per Pound	18.00	12.00	15.00
	2A		Product A	Product B	Product C
		Selling Price	180	270	240
		Less:
		Total Variable Cost	126	162	180
		Contribution Margin	54	108	60
	2B	Company should work on Product Having highest Per Pound of Contribution Margin
	3	Existing Price	9.00
		Add: Lowest Contribution margin Per Pound	12.00
		Maximum Price Per Pound	21.00