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	$	150			$	240			$	200
Variable expenses:
Direct materials		12				48				18
Other variable expenses		108				120				152
Total variable expenses		120				168				170
Contribution margin	$	30			$	72			$	30
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 $6 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 additional pound of materials?

Answer 1

1.

	A	B	C
Direct Material cost per unit	12	48	18
Material cost per pound	6	6	6
So, Raw material required per unit (in pounds)	2	8	3
Contribution Margin	30	72	30
Therefore, contribution margin per pound	15	9	10

2. There is unlimited demand and 5400 pounds of raw materila is available, Barlow will maufacture product A.

Units that could be maufactured with 5400 pounds = 2700 units

Maximum contribution= 2700x30 = $81,000

3. Demand for each product is 600 units and raw material available is 5400 pounds. The company will first produce product A which has highest contribution margin per pound, then product C and then product B.

For 600 units of A, raw material required = 600x2=1200 pounds

For 600 units of B, raw material required = 600x3=1800 pounds

Remaining raw material= 5400-1200-1800= 2400 pounds

Therefore, maximum units of B that could be produced = 2400/8=300 units

	A	B	C
Contribution per unit	30	72	30
Units	600	300	600
Totalcontribution	18000	21600	18000

Therefore, total contribution = $57,600