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 $12 per process hour. The fixed cost is $437,000. 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 3,000 3,000 3,000 Total process hours per unit 17 15 12 Furnace hours per unit 3 5 4 Unit selling price $332 $295 $290 Direct materials cost per unit $113 $105 $98 The furnace operation is part of the total process for each of these three products. Thus, for example, 3 of the 17 hours required to process High Grade steel are associated with the furnace. 1. Determine the unit contribution margin for each product. Contribution Margin Per Unit High Grade $fill in the blank 1 Good Grade $fill in the blank 2 Regular Grade $fill in the blank 3 2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck. Contribution Margin Per Furnace Hour High Grade $fill in the blank 4 Good Grade $fill in the blank 5 Regular Grade $fill in the blank 6

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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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 $12 per process hour. The fixed cost is $437,000. 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	3,000		3,000	3,000
Total process hours per unit	17		15	12
Furnace hours per unit	3		5	4
Unit selling price	$332		$295	$290
Direct materials cost per unit	$113		$105	$98

The furnace operation is part of the total process for each of these three products. Thus, for example, 3 of the 17 hours required to process High Grade steel are associated with the furnace.

1. Determine the unit contribution margin for each product.

	Contribution Margin Per Unit
High Grade	$fill in the blank 1
Good Grade	$fill in the blank 2
Regular Grade	$fill in the blank 3

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

	Contribution Margin Per Furnace Hour
High Grade	$fill in the blank 4
Good Grade	$fill in the blank 5
Regular Grade	$fill in the blank 6

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