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 Selling price $200 $320 $300 Variable expenses: Direct materials 18 72 27 198 Other variable expenses 122 120 140 225 Total variable expenses 192 60 $128 75 Contribution margin 30% 25% Contribution margin ratio 40% The same raw material is used in all three products. Barlow Company has only 4,100 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 $9 per pound. Required: 1. Compute the amount of contribution margin that will be obtained per pound of material used in each product Contribution margin per unit Direct material cost per unit Direct material cost per pound Pounds of material required per unit L Contribution margin per pound
The Correct Answer and Explanation is :
Let’s break down the required calculation step by step:
Step 1: Contribution Margin per Unit
The contribution margin for each product is given as a percentage of the selling price. We can calculate the contribution margin per unit for each product.
- Product A: Contribution Margin = 30% of Selling Price = 30% * $200 = $60
- Product B: Contribution Margin = 25% of Selling Price = 25% * $320 = $80
- Product C: Contribution Margin = 40% of Selling Price = 40% * $300 = $120
Step 2: Direct Material Cost per Unit
We are provided with the direct material cost for each product, which is as follows:
- Product A: Direct material cost = $18
- Product B: Direct material cost = $72
- Product C: Direct material cost = $27
Step 3: Direct Material Cost per Pound
The material costs $9 per pound. So, we can calculate the direct material cost per pound for each product.
- Product A: Direct material cost per unit = $18, which means pounds of material required = $18 / $9 = 2 pounds
- Product B: Direct material cost per unit = $72, which means pounds of material required = $72 / $9 = 8 pounds
- Product C: Direct material cost per unit = $27, which means pounds of material required = $27 / $9 = 3 pounds
Step 4: Contribution Margin per Pound
Now, we calculate the contribution margin per pound by dividing the contribution margin per unit by the pounds of material required per unit.
- Product A: Contribution Margin per Pound = $60 / 2 pounds = $30
- Product B: Contribution Margin per Pound = $80 / 8 pounds = $10
- Product C: Contribution Margin per Pound = $120 / 3 pounds = $40
Step 5: Conclusion
Based on the contribution margin per pound of material used:
- Product A: $30 per pound
- Product B: $10 per pound
- Product C: $40 per pound
Recommendation: Since Product C provides the highest contribution margin per pound of material, Barlow Company should prioritize Product C to maximize its contribution margin with the available raw material.
Explanation:
In a situation where raw materials are limited, the goal is to maximize the contribution margin per unit of material used. This analysis helps prioritize the products that generate the most profit for each pound of material used. Product C, with the highest contribution margin per pound ($40), should be produced first, followed by Product A ($30), and then Product B ($10). This approach ensures the company utilizes its limited resources in the most profitable way.