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 6,000 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 $8 per pound.
Product
A B C
Selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . $180 $270 $240
Variable expenses:
Direct materials . . . . . . . . . . . . . . . . . . . . . . 24 80 32
Other variable expenses . . . . . . . . . . . . . . 102 90 148
Total variable expenses . . . . . . . . . . . . . . . . . 126 170 180
Contribution margin . . . . . . . . . . . . . . . . . . . . $ 54 $100 $ 60
Contribution margin ratio……………. 30% 37% 25%
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594 Chapter 12
gar07417_ch12_560-631.indd 594 09/28/16 06:19 PM
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 6,000 pounds of raw material on hand?
3. Assuming that Barlow’s estimated customer demand is 500 units per product line, what is the
maximum contribution margin the company can earn when using the 6,000 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
500 units per product line and that the company has used its 6,000 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? Explain