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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Contributon margin per constraint
Chavez Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Chavez 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. Chavez Chemical wants to improve chemical operation profitability. The variable conversion cost is $20 per process hour. The fixed cost is $550,000. In addition, the cost analyst was able to determine the following information about the three products:


The reaction operation is part of the total process for each of these three products. Thus, for example. 1.0 of the 6 hours required to process ethylene is associated with the reactor.
Instructions
Assume that management wishes to improve profitability by increasing prices on selected products. Al what price would ethylene and butane need to by- offered in order to produce the same relative profitability as ester?

To determine

Concept Introduction:

Cost Volume Profit (CVP) Analysis:

The Cost Volume Profit analysis is the analysis of the relation between cost, volume, and profit of a product. It analyzes the cost and profits at the different level of production, in order to determine the breakeven point and required the level of sales to earn the desired profit.

Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones.

The formula for contribution margin is as follows:

Contribution margin = Sales - Variable cost.

Similarly contribution margin ratio = Contribution/sales

To Indicate:

The most profitable product using the bottleneck

Explanation

The most profitable product using the bottleneck is calculated as follows:

    ProductEthylene Butane Ester
    Selling Price per unit (A) $ 400 $ 350 250
    Material Cost per unit (B) $ 180 $ 130 $ 90
    Total Process hours per unit (C) 6 6 4

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