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 $505,000. 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 14 12 9 Furnace hours per unit 4 3 5 Unit selling price $274 $233 $245 Direct materials cost per unit $110 $107 $95 The furnace operation is part of the total process for each of these three products. Thus, for example, 4 of the 14 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 $fill in the blank 1 Good Grade $fill in the blank 2 Regular Grade $fill in the blank 3 2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck. Contribution Margin Per Furnace Hour High Grade $fill in the blank 4 Good Grade $fill in the blank 5 Regular Grade $fill in the blank 6
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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 $505,000. 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 | 14 | 12 | 9 | |||
| Furnace hours per unit | 4 | 3 | 5 | |||
| Unit selling price | $274 | $233 | $245 | |||
| Direct materials cost per unit | $110 | $107 | $95 |
The furnace operation is part of the total process for each of these three products. Thus, for example, 4 of the 14 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 | $fill in the blank 1 |
| Good Grade | $fill in the blank 2 |
| Regular Grade | $fill in the blank 3 |
2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck.
| Contribution Margin Per Furnace Hour |
|
| High Grade | $fill in the blank 4 |
| Good Grade | $fill in the blank 5 |
| Regular Grade | $fill in the blank 6 |
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