Question

Product Pricing and Profit Analysis with Bottleneck Operations Hercules 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 $10 per process hour. The fixed cost is $523,000. In addition, the cost analyst was able to determine the following information about the three products: Good Grade Regular Grade High Grade 5,000 Budgeted units produced 5,000 5,000 15 13 Total process hours per unit Furnace hours per unit Unit selling price $300 $257 $232 $99 Direct materials cost per unit $114 $107 The furnace operation is part of the total process for each of these three products. Thus, for example, 4 of the 15 hours required to process High Grade steel are associated with the furnace. 1. Determine the unit contribution margin for each product. If required, round your answers to two decimal places. Contribution Margin Per Unit High Grade Good Grade Regular Grade 2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck. Contribution Margin

Answer 1

a
	High Grade	Good Grade	Regular Grade
Unit selling price	300	257	232
Less: Variable costs
Direct materials cost per unit	114	107	99
Variable conversion cost @ $10 per process hour	150	130	100
Contribution Margin Per Unit	36	20	33
b
	High Grade	Good Grade	Regular Grade
Contribution Margin Per Unit	36	20	33
Divide by Furnace hours per unit	4	5	3
Contribution Margin Per furnace Hour	9	4	11