E4–5 Time allowed: 20 minutes Barlow Company manufactures three products: A, B and C. The selling price, variable costs and contribution margin for one unit of each product follow:

The same raw material is used in all three products. Barlow Company has only 5,000 kilos of material on hand and will not be able to obtain any more material 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 kilo.
Required 1 Compute the amount of contribution margin that will be obtained per kilo of material used in each product.
2 Which orders would you recommend that the company work on next week – the orders for product A, product B, or product C? Show computations.
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 kilo of materials?

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Selling price Less variable expenses: Product A B 180 270 240 Direct materials 24 72 32 Other variable expenses 102 90 148 Total variable expenses 126 162 180 Contribution margin 54 108 60 Contribution margin ratio 30% 40% 25%