Exercise 12-8 Volume Trade-Off Decisions [L012-5, LO12-6] 10 points Barlow Compa

Question

Exercise 12-8 Volume Trade-Off Decisions [L012-5, LO12-6] 10 points 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 S150S240 $200 selling price Variable expenses: eBook Direct materials Other variable expenses 12 48 18 Hint 108 120 152 Total variable expenses 120 _168170 Contribution margin Contribution margin ratio $ 30 $ 72 $ 30 Print 20% 30% 15% Reference The same raw material is used in all three products. Barlow Company has only 5,400 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 $6 per 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 5,400 pounds of raw material on hand? 3. Assuming that Barlow's estimated customer demand is 600 units per product line, what is the maximum contribution margin the company can earn when using the 5,400 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 600 units per product line and that the company has used its 5,400 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? Complete this question by entering your answers in the tabs below Required Required Required Required Calculate the contribution margin per pound of the constraining resource for each product 2 3 4 Contribution margin per pound of the constrained resource Required Required 2

Explanation / Answer

1. Direct material required= Direct material cost/cost per pound

A=$12/$6=2 pounds

B=$48/$6=8 pounds

C=$18/$6= 3 pounds

2. Since the company has unlimited demand for each product, it will produce product A because contribution per pound of material is maximum in this case.

Contribution=$15×5400 pounds= $81000

3. Now the maximum demand is 600 units

First of all product A will be produced to maximum, then product C and thereafter product B. This is in accordance with contribution per unit of constraint material from highest to lowest.

* Raw material exhausted in producing unit A and C=3000 pounds

Remaining=5400-3000=2400 pounds

For producing1 unit of B =8 pounds

Thus, B possible units=2400/8=300 units

4. To fulfill customer demand highest price could be at that point where the contribution from product B (Without considering raw material cost) is zero.

Thus, $240-$120=$120 per unit

Raw material=$120/8pounds= $15 per pound

Thus, highest price is $15 per pound.

Do give your feedback!! Happy Learning :)

A B C Contribution margin per unit $30 $72 $30 Material in pounds per unit 2 8 3 Contribution per unit of material $15 $9 $10

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