Exercise 10-8 Utilization of a Constrained Resource [LO10-5, LO10-6] Barlow Comp

Question

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

300

  

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.

  

Compute the amount of contribution margin that will be obtained per pound of material used in each product.

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Which order would you recommend that the company work on next week—the orders for product A, product B, or product C?

Product C

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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Barlow Company manufactures three products: A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow:

Explanation / Answer

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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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

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