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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
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.

a)

To determine

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.

To Determine: The contribution margin per unit for each product of Company HS.

Explanation

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.

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

High Grade Good Grade Regular Grade
Selling Price $280.00 $270.00 $250.00
Variable conversion cost per unit
  1. (1)   $180.00
(2)   $165.00 (3)    $150.00
Direct material cost per unit $90.00 $84.00 $80.00
$270.00 $249.00 $230.00
Contribution margin per unit $10.00 $21.00 $20.00

Hence, the contribution margin for high grade steel is $10.00 per unit, for good grade steel is $21.00 per unit, and for regular grade steel is $20.00 per unit.

Working Note:

Calculate the variable conversion cost per unit of high grade steel...

b)

To determine
The relative product profitability per unit for each product of Company HS.

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