Exercise 12-8 Utilization of a Constrained Resource [LO12-5, LO12-6]

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
	A				B				C
Selling price	$	200			$	250			$	220
Variable expenses:
Direct materials		32				80				40
Other variable expenses		108				70				125
Total variable expenses		140				150				165
Contribution margin	$	60			$	100			$	55
Contribution margin ratio		30	%			40	%			25	%

The same raw material is used in all three products. Barlow Company has only 5,300 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 suppliers 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.

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

	A	B	C
Contribution margin per unit
Direct material cost per unit
Direct material cost per pound
Pounds of material required per unit
Contribution margin per pound

2a.	Compute the amount of contribution margin on each product.
	A B C

Contribution margin per pound

Pounds of material available

Total contribution margin

2b.

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

	Product A
	Product B
	Product C

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 pound of materials?