Hercules Steel 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 $15 per process hour. The fixed cost is $200,000. In addition, the cost analyst was able to determine the following information about the three products: CategoryHigh GradeGood GradeRegular GradeBudgeted units produced4,9004,9004,900Total process hours per unit11109Furnace hours per unit432.5Unit selling price$270$260$240Direct materials cost per unit$85$81$75 The furnace operation is part of the total process for each of these three products. Thus,for example, 4.0 of the 12.0 hours required to process High Grade steel are associated with the furnace.Determine the unit contribution margin for each product. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck.

There are two types of expenses, Variable and fixed. Variable cost are the coat that vary according…

Answered: Determine the unit contribution margin…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter20: Inventory Management: Economic Order Quantity, Jit, And The Theory Of Constraints

Section: Chapter Questions

Problem 16E

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Hercules Steel 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 $15 per process hour. The fixed cost is $200,000. In addition, the cost analyst was able to determine the following information about the three products:

Category	High Grade	Good Grade	Regular Grade
Budgeted units produced	4,900	4,900	4,900
Total process hours per unit	11	10	9
Furnace hours per unit	4	3	2.5
Unit selling price	$270	$260	$240
Direct materials cost per unit	$85	$81	$75

The furnace operation is part of the total process for each of these three products. Thus,

for example, 4.0 of the 12.0 hours required to process High Grade steel are associated with the furnace.

Determine the unit contribution margin for each product.
Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck.

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