Utilization of a Constrained Resource Badow Company manufactures three products:
ID: 2466644 • Letter: U
Question
Utilization of a Constrained Resource Badow Company manufactures three products: A, B, and C. The selling price, variable costs, and contribution margin tor one unit of each product follow: The same raw material is used in all three products. Barlow Company has only 5.000 pounds of raw material on hand and will not he 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: Compute the amount of contribution margin that will be obtained per pound of material used in each product. Which orders would you recommend that the company work on next week-the orders for product A. product B. or product C? Show computations. A foreign supplier could furnish Barlow with additional stocks of the raw material at a substantial premium over the usual price. II 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? Explain.Explanation / Answer
1)
2)
The oreder of proiduction based on the contribution per unit of material for the three products are
Product A - rank 1
product C - rank 2
Product B - rank 3
3)
The maximum price that could be offered to the foreign supplier is $12 per pound of raw material if the company fulfills the unsatisfied demand for all the three orders.
The price should offred should be lowest of the contribution per pound of raw material, because if the company offers a higher price then there will be a negative contribution from product B.
A B C a) Contribution margin per unit $ 54.00 $ 108.00 $ 60.00 b) Raw material cost per unit $ 24.00 $ 72.00 $ 32.00 c) raw material cost per pound of raw material $ 8.00 $ 8.00 $ 8.00 d) raw material required per unit (b/c) (pound) 3 9 4 e) Contribution per pound of material $ 18.00 $ 12.00 $ 15.00 Ranking 1 3 2Related Questions
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