Question

In: Accounting

Barlow Company manufactures three products—A, B, and C. The selling price, variable costs, and contribution margin...

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

Solutions

Expert Solution

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)

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