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			$	270			$	240
Variable expenses:
Direct materials		24				80				32
Other variable expenses		102				90				148
Total variable expenses		126				170				180
Contribution margin	$	54			$	100			$	60
Contribution margin ratio		30	%			37	%			25	%

The same raw material is used in all three products. Barlow Company has only 6,600 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 6,600 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 6,600 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 6,600 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

Solution:
1	Computation of contribution margin per pound:
		A	B	C
	Contribution Margin per unit	54	100	60
	Direct Material Cost per unit	24	80	32
	Direct Material Cost per Pound	8	8	8
	Pounds of Material used per unit	3	10	4
	Contribution Margin Per Pound	18	10	15
2	The material is constrain for the production. The contribution margin per pound of product A
	is highset. So the company will produce the product A for getting highest contribution.
	The available material = 6600 pounds
	The material require for each unit production of A = 3
	So total Product A produce = (6600/3) = 2200 units
	Contribution per unit of Product A = 54
	So total Contribution = (54*2200) = $ 1,18,800
3	Material Available is 6600 pounds
	Demand for each product 500 units
	As per contributionper pound the ranking is:
	Ranking 1 = Product A
	Ranking 2 = Product C
	Ranking 3 = Product B
	So no units produce:
	Total Material	6,600.00
	Less: Material Used for Product A
	(500*3)	1,500.00
		5,100.00
	Less: Material Used for Product C
	(500*4)	2,000.00
	Material Available for product B	3,100.00
	Material require for 1 unit of product B	10.00
	So no of units produce	310.00
	So the total Contribution:
	From Product A (500*54)	27,000.00
	From Product B (310*100)	31,000.00
	From Product C (500*60)	30,000.00
	Total Contribution	88,000.00
4	The compnay is able to produce 310 units of Product B. But the demand for the same is 500.
	To produce the additional units the company can pay excess amout to the foreign vendor equal
	to the contribution margin per pound of the Product B i.e. 10.
	So the highest price per pound of additional material is = (8+10) = $18.