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	$	160			$	270			$	230
Variable expenses:
Direct materials		16				80				24
Other variable expenses		108				90				152
Total variable expenses		124				170				176
Contribution margin	$	36			$	100			$	54
Contribution margin ratio		23	%			37	%			23	%

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

A		Product A	Product B	Product C				Product A	Product B	Product C
	Selling Price	160.00	270.00	230.00			Direct Material	16.00	80.00	24.00
	Less: Variable Costs	124.00	170.00	176.00			PU Cost	8.00	8.00	8.00
	Contribution Margin	36.00	100.00	54.00			Material PU	2.00	10.00	3.00
	Direct Material Per PU	2.00	10.00	3.00
	Contribution Margin Per Pound	18.00	10.00	18.00
		A	B	A/B
B	Unlimited Demand:	Material Avaiable	Material PU	Units	CM PU	CM Total
	Product A	6,000	2.00	3,000	36.00	1,08,000
	Product B	-
	Product C	6,000	3.00	2,000	54.00	1,08,000
	Company can produce any one of Product A & C, Resulting in contribution 108000
		A	B
C	Limited Demand	Material Avaiable	Material PU	Ranking	Production as per Rank
	Product A	6,000	2.00	I	1,000		Material Left	3,500
	Product B	6,000	10.00	II	3,500		(6000-1000-2500)
	Product C	6,000	3.00	I	1,500		Material PU of B	10.00
					6,000		Units of Product B	350.00
		Units	CM PU	CM Total
	Product A	500	36	18,000
	Product B	350	100	35,000
	Product C	500	54	27,000
			Max Contru	80,000
D
	Units Left of Product B	150	(500-350)
	CM PU	100
	CM TOTAL	15,000
	Pounds Required	1,500
	Max Payment Per Pound	10