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 $ 240 $ 360 $ 320 Variable expenses: Direct materials 21 63 28 Other variable expenses 147 153 212 Total variable expenses 168 216 240 Contribution margin $ 72 $ 144 $ 80 Contribution margin ratio 30 % 40 % 25 % 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 $7 per pound. Required: 1. Compute the amount of contribution margin that will be obtained per pound of material used in each product. 2a. Compute the amount of contribution margin on each product. 2b. Which orders would you recommend that the company work on next week—the orders for product A, product B, or product C? Product A Product B Product C 3. A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. If there is unfilled demand for all three products, what is the highest price that Barlow Company should be willing to pay for an additional pound of materials?

Answer 1

Solution-1: Calculation for Contribution Margin per pound of raw material

	A	B	C
Selling Price per unit (1)	240	360	320
Variable expenses
Direct Material (a)	21	63	28
Other variable expense	147	153	212
Total Variable cost (2)	168	216	240
Contribution per unit [1-2]	72	144	80
Contribution Margin	30.0%	40.0%	25.0%
Material cost per pound (b)	7	7	7
No. of Pounds used (a)/(b)	3	9	4
Contribution per pound of raw material	24	16	20

Solution- 2A: Amount of Contribution per product:

	A	B	C
Selling Price per unit (1)	240	360	320
Variable expenses
Direct Material (a)	21	63	28
Other variable expense	147	153	212
Total Variable cost (2)	168	216	240
Contribution per unit [1-2]	72	144	80
Contribution Margin	30.0%	40.0%	25.0%

Solution- 2B: As per solution 1, company gets a contribution of $24 per pound of raw material if raw material is spent for the production of Product 'A'. In case of restriction on raw material, recommendation to company would be to spend the raw material in production of Product 'A' since it givesthe maximum contribution per pound of raw material.

Solution- 2C: If there is unfulfilled demand of any of the product, Company may buy raw material at higher prices in case material is not available at the earlier prices.

Solution-3: For Product A, Company is currenctly earning paying a price of $7 per pound. After paying 7$ per pound, company earns a contribution of $24 per pound. Company can pay a maximum amount of $31 per pound (24+7) in case company have to forego all the contribution made.

Highest price company may be ready to pay is $31 per pound of raw maerial.