In: Accounting
Exercise 10-8 Utilization of a Constrained Resource [LO10-5, LO10-6]
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 | $ | 200 | $ |
300 |
$ | 260 | |||||
Variable expenses: | |||||||||||
Direct materials | 28 | 70 | 35 | ||||||||
Other variable expenses | 112 | 110 | 160 | ||||||||
Total variable expenses | 140 | 180 | 195 | ||||||||
Contribution margin | $ | 60 | $ | 120 | $ | 65 | |||||
Contribution margin ratio | 30 | % | 40 | % | 25 | % | |||||
The same raw material is used in all three products. Barlow Company has only 4,700 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. HOME ACCESSIBILITY PREVIEW
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Solution:
Part 1 --- Contribution Margin Per Pound
A |
B |
C |
|
Contribution Margin per unit (given) (P) |
$60 |
$120 |
$65 |
Direct material cost per unit (A) |
$28 |
$70 |
$35 |
Direct material cost per pound (B) |
$7 |
$7 |
$7 |
Pounds of material required per unit (R = A / B) |
4 |
10 |
5 |
Contribution Margin per pound (P/R) |
$15 |
$12 |
$13 |
Part 2(a) --- the amount of contribution margin on each product
A |
B |
C |
|
Contribution Margin per pound |
$15 |
$12 |
$13 |
Pounds of material available |
4700 |
4700 |
4700 |
Total contribution margin |
$70,500 |
$56,400 |
$61,100 |
Part 2(b) --- Product A would be recommended that the company work on next week since the Product A will generate highest contribution margin for the company.
Part 3 – The highest price is the Contribution Margin per pound for Product A $15 per pound.
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