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			$	240
Variable expenses:
Direct materials		18				90				27
Other variable expenses		126				120				177
Total variable expenses		144				210				204
Contribution margin	$	36			$	90			$	36
Contribution margin ratio		20	%			30	%			15	%

The same raw material is used in all three products. Barlow Company has only 6,300 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. 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 6,300 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 6,300 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 6,300 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

Based on the information above, we can summarize the data as follows :-

1.) The contribution margin per pound can be calculated as follows :-

2.) As can be seen from the calculation above, the maximum contribution per pound is obtained when from Product A. Product A requires pounds of raw materials to produce one product. So 6,300 pounds * 18 per pound = $113,400 is the maximum possible contribution with the available resources.

3.) The company has a minimum demand of 600 products per product line. Raw materials required per product is as folllows :-

Product A - 2 pounds

Product B - 10 pounds

Product C - 3 pounds

Also, the order of maximum contribution margin per unit is as follows

Product A - 18 per pound

Product C - 12 per pound

Product B - 9 per pound

So prioritizing the order of units according to maximum contribution :-

Product A - 600 units * 2 pounds per unit = 1200 pounds

Product B - 600 units * 3 pounds per unit = 1800 pounds

Remaining pounds = 6300 - 1200 - 1800

Remaining pounds = 3300 pounds.

Product C = 3300 pounds / 10 units per pound = 330 units

Product A contribution margin = 1200 pounds * 18 per pound = $21,600

Product C contribution margin = 1800 pounds * 12 per pound = $21,600

Product B Contribution margin = 3300 pounds * 10 per pound = $33,000

Total Optimal contribution margin = $76,200

4.) Requirement for completing Product B = 6000 pounds required - 3300 pounds completed already (refer above ) = 2700 pounds is $18(Contribution per pound + Cost per pound)