You shouldn't use the word retarded as an insult.
Barry watches his friend clown around with his other friends, and he laughs hysterically.
Barry wants to say something in the spirit of the moment.
Barry tells his friend that he loves it when they all get together and laugh like that, it's his favorite part of life.
Barry jokingly calls his friend retarded for acting in such a silly manner.
His friends agree with him that the moments where they all get together and laugh are the best of times, and everyone feels great.
One of Barry's friends is insulted by the comment, because he has a family member who is retarded and does not see it as a joke.