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 $ 300 $ 250 Variable expenses: Direct materials 20 90 30 Other variable expenses 120 120 184 Total variable expenses 140 210 214 Contribution margin $ 40 $ 90 $ 36 Contribution margin ratio 22 % 30 % 14 % 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 $10 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 500 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 500 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

Part 1

	A	B	C
(1)Contribution margin per unit	40	90	36
(2)Direct material cost per unit	20	90	30
(3)Direct material cost per pound	10	10	10
(4)Pounds of material required per unit (2) ÷ (3)	2	9	3
(5)Contribution margin per pound (1) ÷ (4)	20	10	12

Part 2

Assuming that Barlow has unlimited demand for each of its three products, all pounds of raw materials will be used to produce Product A as it has highest contribution margin per pound

Maximum contribution margin = 5400*20 = $108000

	A	B	C
Contribution margin per pound	20	10	12
Pounds of material available	× 5,400	× 5,400	× 5,400
Total contribution margin	108000	54000	64800

Part 3

First pounds should be allocated to product A (because of highest contribution margin per pound)

Then to product C (next highest contribution margin per pound)

And lastly to product B (lowest contribution margin per pound)

	A	B	C
Contribution margin per pound	20	10	12
Pounds of material used	× 1000 (500*2)	× 2900 (5400-1000-1500)	× 1500 (500*3)
Total contribution margin	20000	29000	18000	67000

Maximum contribution margin = $67000

Part 4

Company willing to pay = usual price + contribution margin per pound of product B = $10 + $10 = $20