Question

Product Pricing and Profit Analysis with Bottleneck Operations Hercules Company produces three grades of steel: high, good, and regular grade. Each of these products (grades) has high demand in the market, and Hercules is able to sell as much as it can produce of all three. The furnace operation is a bottleneck in the process and is running at 100% of capacity. Hercules wants to improve steel operation profitability. The variable conversion cost is $10 per process hour. The fixed cost is $405,000. In addition, the cost analyst was able to determine the following information about the three products: High Grade Good Grade Regular Grade Budgeted units produced 5,000 5,000 5,000 Total process hours per unit 15 13 10 Furnace hours per unit 4 3 5 Unit selling price $296 $247 $249 Direct materials cost per unit $114 $105 $99 The furnace operation is part of the total process for each of these three products. Thus, for example, 4 of the 15 hours required to process High Grade steel are associated with the furnace. 1. Determine the unit contribution margin for each product. If required, round your answers to two decimal places. Contribution Margin Per Unit High Grade $ Good Grade $ Regular Grade $ 2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck. Contribution Margin Per Furnace Hour High Grade $ Good Grade $ Regular Grade $

Answer 1

SOLUTION

		High Grade	Good Grade	Regular Grade
	Budgeted Units of Production	5,000	5,000	5,000
	Unit Selling Price	296	247	249
	Direct Material	114	105	99
	Variable Processing Cost @10 per hour	150	130	100
	Variable Cost per unit (material +Processing Cost)	264	235	199
Part 1	Contribution per unit production (Unit Sale price - Variable Cost) (A)	32	12	50
	Furnace Hours used (B)	4	3	5
Part 2	Contribution per Furnace hour (A/B)	8	4	10
	Rank	2	3	1