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

Req 1		A	B	C
	Material cost PER Unit	24	80	32
	Material cost per pound	8	8	8
	Pounds of material unit per product 1 unit	3	10	4
	(material cost per unit/per pound rate)
	Contribution per unit	54	100	60
	Contribution per pound	18	10	15
	(Contribution per unit/no. of pounds required per 1 unit)
Req 2	Product A should be manufactured due to highest contribution per pound
	No. of units can be produced	2200	(6600/3 pound per unit)
	Contribution per unit	54
	Total maximum contribution	118800
Req 3		A	B	C	Total
	Ranking of production	1	3	2
	No. of Units	500	310	500
	No. of pounds used	1500	3100	2000	6600
			(Balancing figure)
	Contribution per unit	54	100	60
	Total Contribution	27000	31000	30000	88000
Req 4	Highest Price can be offered to Foreign Supplier	10	(Upto the contribution product yielding lowest contribution per pound)