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			$	240
Variable expenses:
Direct materials		18				72				27
Other variable expenses		126				96				177
Total variable expenses		144				168				204
Contribution margin	$	36			$	72			$	36
Contribution margin ratio		20	%			30	%			15	%

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 $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 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 additio

Answer 1

Req 1		A	B	C
	Material cost PER Unit	18	72	27
	Material cost per pound	9	9	9
	Pounds of material unit per product 1 unit	2	8	3
	(material cost per unit/per pound rate)
	Contribution per unit	36	72	36
	Contribution per pound	18	9	12
	(Contribution per unit/no. of pounds required per 1 unit)
Req 2	Product A should be manufactured due to highest contribution per pound
	No. of units can be produced	2700	(5400/2 pound per unit)
	Contribution per unit	36
	Total maximum contribution	97200
Req 3		A	B	C	Total
	Ranking of production	1	3	2
	No. of Units	600	300	600
	No. of pounds used	1200	2400	1800	5400
			(Balancing figure)
	Contribution per unit	36	72	36
	Total Contribution	21600	21600	21600	64800
Req 4	Highest Price can be offered to Foreign Supplier	9	(Upto the contribution product yielding lowest contribution per pound)