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			$	240			$	220
Variable expenses:
Direct materials		18				72				30
Other variable expenses		126				96				140
Total variable expenses		144				168				170
Contribution margin	$	36			$	72			$	50
Contribution margin ratio		20	%			30	%			23	%

The same raw material is used in all three products. Barlow Company has only 5,400 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 $6 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 5,400 pounds of raw material on hand?

3. Assuming that Barlow’s estimated customer demand is 600 units per product line, what is the maximum contribution margin the company can earn when using the 5,400 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 600 units per product line and that the company has used its 5,400 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

Req 1		A	B	C
	Direct materials per unit	18	72	30
	Direct materials cost per unit	6	6	6
	material unit /1 unit (Pound)	3	12	5
	(material cost per unit/per pound rate)
	Contribution per unit	36	72	50
	Contribution per pound	12	6	10
	(Contribution per unit/no. of pounds required per 1 unit)
Req 2	Product A should be manufactured because of highest contribution margin per pound
	Maximum units can be produced with given material	1800	(5400/3 pound per unit)
	Contribution per unit	36
	Total maximum contribution	64800
Req 3		A	B	C	Total
	Product ranking (OF production)	1	3	2
	No. of Units	600	50	600
	No. of pounds used	1800	600	3000	5400
			(Balancing figure)
	Contribution per unit	36	72	50
	Total Contribution	21600	3600	30000	55200
Req 4	Highest Price can be offered to Foreign Supplier	6	(Upto the contribution product yielding lowest contribution per pound)