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	$	240			$	320			$	300
Variable expenses:
Direct materials		18				72				27
Other variable expenses		174				152				228
Total variable expenses		192				224				255
Contribution margin	$	48			$	96			$	45
Contribution margin ratio		20	%			30	%			15	%

  

The same raw material is used in all three products. Barlow Company has only 4,900 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 $9 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

Answer:
1)
Particulars	Product A	Product B	Product C
Contribution margin per unit	$ 48	$ 96	$ 45
Direct material Cost per unit	18	72	27
Direct material Cost per Pound	$ 9	$ 9	$ 9
Pound of Material required per Unit	2 (18 / $ 9)	8 (72 / $ 9)	3 (27/ $ 9)
Contribution margin per pound	24 ($ 48 / 2)	12 ($ 96 / 8)	15 ($ 45 / 3)
2a)
	Product A	Product B	Product C
Contribution margin per pound	24	12	15
x Pounds of Material Available	4,900	4,900	4,900
Total Contribution margin	$ 117,600	$ 58,800	$ 73,500
Rank	1	3	2
2b)
Product A should be recommended since Contribution margin is high for Product A
3)
Highest price that Barlow Company should be willing to pay for an additional pound of materials	Max. Contribution Margin per Pound + Material Cost per Pound	24 + 9	$ 33
Maximum Amount	33	per Pound