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 $14 per process hour. The fixed cost is $380,000. 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 3,000 3,000 3,000 Total process hours per unit 16 14 11 Furnace hours per unit 5 3 4 Unit selling price $373 $307 $300 Direct materials cost per unit $114 $105 $98 The furnace operation is part of the total process for each of these three products. Thus, for example, 5 of the 16 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.
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 $14 per process hour. The fixed cost is $380,000. 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 | 3,000 | 3,000 | 3,000 | |||
| Total process hours per unit | 16 | 14 | 11 | |||
| Furnace hours per unit | 5 | 3 | 4 | |||
| Unit selling price | $373 | $307 | $300 | |||
| Direct materials cost per unit | $114 | $105 | $98 |
The furnace operation is part of the total process for each of these three products. Thus, for example, 5 of the 16 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 |
Contribution margin is defined as the selling price per unit less the variable cost per unit. The word contribution states the sales revenue portion which is not consumed through variable costs as well as contributes to the coverage of the fixed costs.
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