Wilmington Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Wilmington Chemical is able to sell as much as it can produce of all three. The reaction operation is a bottleneck in the process and is running at 100% of capacity. Wilmington wants to improve chemical operation profitability. The variable conversion cost is $10 per process hour. The fixed cost is $400,000. In addition, the cost analyst was able to determine the following information about the three products:               Ethylene              Butane              EsterBudgeted units produced9,000 9,000 9,000 Total process hours per unit4.0 4.0 3.0 Reactor hours per unit1.5 1.0 0.5 Unit selling price$170 $155 $130 Direct materials cost per unit$115 $88 $85 The reaction operation is part of the total process for each of these three products. Thus, for example, 1.5 of the 4.0 hours required to process ethylene is associated with the reactor.Required:1.  Determine the unit contribution margin for each product. Contribution MarginPer UnitEthylene$Butane$Ester$2.  Provide an analysis to determine the relative product profitabilities, assuming that the reactor is a bottleneck. Contribution MarginPer Reactor HourEthylene$Butane$Ester$

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Asked Dec 1, 2019
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Wilmington Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Wilmington Chemical is able to sell as much as it can produce of all three. The reaction operation is a bottleneck in the process and is running at 100% of capacity. Wilmington wants to improve chemical operation profitability. The variable conversion cost is $10 per process hour. The fixed cost is $400,000. In addition, the cost analyst was able to determine the following information about the three products:

                Ethylene               Butane               Ester
Budgeted units produced 9,000   9,000   9,000  
Total process hours per unit 4.0   4.0   3.0  
Reactor hours per unit 1.5   1.0   0.5  
Unit selling price $170   $155   $130  
Direct materials cost per unit $115   $88   $85  

The reaction operation is part of the total process for each of these three products. Thus, for example, 1.5 of the 4.0 hours required to process ethylene is associated with the reactor.

Required:

1.  Determine the unit contribution margin for each product.

  Contribution Margin
Per Unit
Ethylene $
Butane $
Ester $

2.  Provide an analysis to determine the relative product profitabilities, assuming that the reactor is a bottleneck.

  Contribution Margin
Per Reactor Hour
Ethylene $
Butane $
Ester $
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Expert Answer

Step 1

Production Bottleneck: Production Bottleneck is a situation of constraint in the manufacturing company, where the demand for goods is higher, than the production capacity of the company. In this situation the production or contribution per bottleneck hour is calculated to determine the value of a product.

 Contribution margin: Contribution margin is the excess of manufacturing margin above selling and administrative expenses. Contribution margin is calculated by deducting variable cost from sales.

Step 2

Calculate the contribution margin per unit for each product of Company WC.

 

Hence, the contribution margin for Ethylene is $15.00 per unit, for Butane is $27.00 per unit, and for Ester is $15.00 per unit.

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Ethylene Butane Ester Selling Price Variable conversion cost per unit Direct material cost per unit $170.00 $155.00 $130.00 (1) $40.00 (3) $30.00 (2) $40.00 $115.00 $85.00 $88.00 $115.00 $155.00 $128.00 Contribution margin per unit $15.00 $27.00 $15.00

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Step 3

Working Note: 

Calculate the variable conversion cost ...

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Variable conversi on cost (Variable conversi on cost xTotal process hours s10x4 process hours = S40

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