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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 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 $14 per process hour. The fixed cost is $391,000. In addition, the cost analyst was able to determine the following information about the three products: High Grade 7,000 Good Grade 7,000 15 17 5 Budgeted units produced Total process hours per unit Furnace hours per unit Unit selling price $384 $324 $309 Direct materials cost per unit $111 $108 $97 The furnace operation is part of the total process for each of these three products. Thus, for example, 5 of the 17 hours required to process High Grade steel are associated with the furnace. 1. Determine the unit contribution margin for each product. Regular Grade 7,000 3 12 4

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 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 $14 per process hour. The fixed cost is $391,000. In addition, the cost analyst was able to determine the following information about the three products: High Grade 7,000 Good Grade 7,000 15 17 5 Budgeted units produced Total process hours per unit Furnace hours per unit Unit selling price $384 $324 $309 Direct materials cost per unit $111 $108 $97 The furnace operation is part of the total process for each of these three products. Thus, for example, 5 of the 17 hours required to process High Grade steel are associated with the furnace. 1. Determine the unit contribution margin for each product. Regular Grade 7,000 3 12 4

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 $14 per process hour. The fixed cost is $391,000. In addition, the cost analyst was able to determine the following information about the three products: High Grade 7,000 Budgeted units produced Total process hours per unit Furnace hours per unit High Grade Good Grade High Grade Good Grade $ Regular Grade $ $ Unit selling price $324 $309 Direct materials cost per unit $108 $97 The furnace operation is part of the total process for each of these three products. Thus, for example, 5 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 $ 17 $ 5 $ Good Grade 7,000 $384 $111 15 Regular Grade 2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck. Contribution Margin Per Furnace Hour 3 Regular Grade 7,000 12 4
Transcribed Image Text: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 $14 per process hour. The fixed cost is $391,000. In addition, the cost analyst was able to determine the following information about the three products: High Grade 7,000 Budgeted units produced Total process hours per unit Furnace hours per unit High Grade Good Grade High Grade Good Grade $ Regular Grade $ $ Unit selling price $324 $309 Direct materials cost per unit $108 $97 The furnace operation is part of the total process for each of these three products. Thus, for example, 5 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 $ 17 $ 5 $ Good Grade 7,000 $384 $111 15 Regular Grade 2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck. Contribution Margin Per Furnace Hour 3 Regular Grade 7,000 12 4
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