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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Product pricing and profit analysis with bottleneck operations

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 510 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 15 1.0 0.5
Unit selling price $170 $155 $130
Direct materials cost per unit S115 $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.

Instructions

1. Determine the unit contribution margin for each product.

2. Provide an analysis to determine the relative product profitabilities, assuming that the reactor 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 WC.

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 WC.

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

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.

Working Note:

Calculate the variable conversion cost per unit of Ethylene...

b)

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

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