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Product pricing and profit analysis with bottleneck operations 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: High Grade Good Grade Regular Grade Budgeted units produced 5,000 5.000 5,000 Total process hours per unit 12 11 10 Furnace hours per unit 4 3 2.5 Unit selling price $280 $270 $250 Direct materials cost per unit $90 $84 $80 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. Instructions 1. Determine the unit contribution margin for each product. 2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 25, Problem 25.6APR
Textbook Problem

Product pricing and profit analysis with bottleneck operations

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:

  High Grade Good Grade Regular Grade
Budgeted units produced 5,000 5.000 5,000
Total process hours per unit 12 11 10
Furnace hours per unit 4 3 2.5
Unit selling price $280 $270 $250
Direct materials cost per unit $90 $84 $80

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.

Instructions

1. Determine the unit contribution margin for each product.

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

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Chapter 25 Solutions

Accounting
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