Question

1.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 $

350

$ 300

  Variable expenses:
    Direct materials 32 80 40
    Other variable expenses 136 130 185

  Total variable expenses 168 210 225

  Contribution margin $ 72 $ 140 $ 75

  Contribution margin ratio 30 % 40 % 25 %

  

The same raw material is used in all three products. Barlow Company has only 4,000 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.

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 order 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?

2.

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows:

Department

Total Hardware Linens
  Sales $ 4,080,000 $ 3,030,000 $ 1,050,000
  Variable expenses 1,222,000 817,000 405,000

  Contribution margin 2,858,000 2,213,000 645,000
  Fixed expenses 2,210,000 1,340,000 870,000

  Net operating income (loss) $ 648,000 $ 873,000 $ (225,000 )

A study indicates that $375,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 19% decrease in the sales of the Hardware Department.

Required:

If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

     

Answer 1

As per policy only first question will be answered completely

Part 1

		A	B	C
1	Contribution margin Per unit	72	140	75
2	direct material cost per unit	32	80	40
3	direct material cost per pound	8	8	8
4	pounds of material required per unit (2÷3)	4	10	5
5	contribution margin Per pound 1÷4	18	14	15

Part 2A

	A	B	C
Contribution margin Per pound	18	14	15
Pound of raw materials available	× 4000	× 4000	× 4000
Total contribution margin	72000	56000	60000

Part 2 B

Product A- 1st

Product B-3rd

Product C-2nd

(because product A has the highest contribution margin Per pound).

Part 3

The price Barlow Company would be willing to pay per pound for additional raw materials depends on how the materials would be used. If there are unfilled orders for all of the products, Barlow would presumably use the additional raw materials to make more of product A. Each pound of raw materials used in product A generates $18 of contribution margin over and above the usual cost of raw materials. Therefore, Barlow should be willing to pay up to $26 per pound ($8 usual price + $18 contribution margin per pound) for the additional raw material, but would of course prefer to pay far less. The upper limit of $26 per pound to manufacture more product A signals to managers how valuable additional raw materials are to the company.If all of the orders for product A have been filled, Barlow Company would then use additional raw materials to manufacture product C. The company should be willing to pay up to $23 per pound ($8 usual price + $15 contribution margin per pound) for the additional raw materials to manufacture more product C, and up to $22 per pound ($8 usual price + $14 contribution margin per pound) to manufacture more product B if all of the orders for product C have been filled as well.