Question

Exercise 11-8 Volume Trade-Off Decisions [LO11-5, LO11-6]

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

Solution 1:

Computation of contribution margin per pound - Barlow company
Particulars	Product A	Product B	Product C
Contribution margin per unit	$54.00	$100.00	$60.00
Raw material required per unit (In pound)	3	10	4
Contribution margin per pound of material	$18.00	$10.00	$15.00
Rank	1	3	2

Solution 2:

As demand of each product is unlimited therefore entire material will be used in production of Product A.

Nos of units to be produced for Product A =6000 / 3=  2000 units

Maximum contribution margin = 2000 * $54 = $108,000

Solution 3:

If maximum demand of product is 500 units then optimal use of material to earn maximum contribution margin

Product A = 500 units *3 = 1500 Pounds

Product C = 500*4 = 2000 Pounds

Product B = 250*10 = 2500 Pounds

Maximum contribution margin that company can earn = (500*$54) + (500*$60) + (250*$100)

= $82,000

Solution 4:

Additional pound of material will be utilized to Produce product B.

Therefore the highest price that Barlow company is willing to pay for additional pound of material = Regular price + Contribution margin per pound of product B

= $8 + $10 = $18 per pound