High Grade 5,000 Good Grade 5,000 Regular Grade 5,000 Budgeted units produced Total process hours per unit 12 11 10 Furnace hours per unit Unit selling price Direct materials cost per unit 3 2.5 $280 $270 $250 $90 $84 $80
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:
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 margiñ for each product.
2. Provide an analysis to determine the relative product
profitability, assuming that the furnace is a bottleneck.
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