Exercise 7-8 Utilization of a Constrained Resource [LO7-5, LO7-6]

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	$	180			$	240			$	240
Variable expenses:
Direct materials		18				72				27
Other variable expenses		126				96				177
Total variable expenses		144				168				204
Contribution margin	$	36			$	72			$	36
Contribution margin ratio		20	%			30	%			15	%

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 suppliers plant. Management is trying to decide which product(s) to concentrate on next week in filling its backlog of orders. The material costs $9 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	$18	$9	$12
Direct material cost per unit	$9
Direct material cost per pound
Pounds of material required per unit	0	0	0
Contribution margin per pound	$18	$9	$12

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?

Maximum amount

per pound