# Exercise 12-8 Volume Trade-Off Decisions [LO12-5, LO12-6] Barlow Company manufactures three products

Exercise 12-8 Volume Trade-Off Decisions [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
\$
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 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. 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 5,400 pounds of raw material on hand?
3. Assuming that Barlow’s estimated customer demand is 600 units
per product line, what is the maximum contribution margin the
company can earn when using the 5,400 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 600 units per
product line and that the company has used its 5,400 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?

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