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Exercise 10-8 Utilization of a Constrained Resource [LO10-5, LO10-6] Barlow Company manufactures three products: A, B,...

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.

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A B C
Contribution margin per unit
Direct material cost per unit
Direct material cost per pound
Pounds of material required per unit
Contribution margin per pound

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2a. Compute the amount of contribution margin on each product.

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A B C
Contribution margin per pound
Pounds of material available
Total contribution margin

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2b.

Which order 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?

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Maximum amount per pound

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Expert Solution

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.

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you


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