Product Pricing and Profit Analysis with Bottleneck Operations Hercules Steel Co
ID: 2432457 • Letter: P
Question
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 $10 per process hour. The fixed cost is $484,000. In addition the cost analyst was able to determine the following information about the three products: High Grade Good Grade 4,000 12 Regular Grade 4,000 Budgeted units produced Total process hours per unit Furnace hours per unit Unit selling price Direct materials cost per unit The furnace operation is part of the total process for each of these three products. Thus, for example, 3 of the 14 hours required to process High Grade steel are associated 4,000 14 278 $240 245 $114 $108 $95 with the furnace. 1. Determine the unit contribution margin for each product 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 bot Contribution Margin Per Furnace Hour High Grade Good Grade Regular Grade Previous NextExplanation / Answer
Data for Calculations
High Grade
Good Grade
Regular Grade
(A)
Selling Price
$ 278.00
$ 240.00
$ 245.00
Less: Variable Costs
(B)
Direct Material per unit
$ 114.00
$ 108.00
$ 95.00
(C )
Conversion Cost Per Unit
$ 140.00 *
$ 120.00
$ 90.00
(D=A-B-C)
Contribution Margin
$ 24.00
$ 12.00
$ 60.00
(E)
Furnace hour Per Unit
3
4
5
(F=D/E)
Contribution Margin per Furnace Hour
$ 8.00
$ 3.00
$ 12.00
*Statement of Total Conversion Cost
High Grade
Good Grade
Regular Grade
Total Processing Hour
14
12
9
Variable Conversion cost per Processing Hour
$ 10.00
$ 10.00
$ 10.00
Total Variable Processing cost
$ 140.00
$ 120.00
$ 90.00
Unit Contribution margin
High Grade
$ 24.00
Good Grade
$ 12.00
Regular Grade
$ 60.00
Contribution Margin per Furnace Hour
High Grade
$ 8.00
Good Grade
$ 3.00
Regular Grade
$ 12.00
Data for Calculations
High Grade
Good Grade
Regular Grade
(A)
Selling Price
$ 278.00
$ 240.00
$ 245.00
Less: Variable Costs
(B)
Direct Material per unit
$ 114.00
$ 108.00
$ 95.00
(C )
Conversion Cost Per Unit
$ 140.00 *
$ 120.00
$ 90.00
(D=A-B-C)
Contribution Margin
$ 24.00
$ 12.00
$ 60.00
(E)
Furnace hour Per Unit
3
4
5
(F=D/E)
Contribution Margin per Furnace Hour
$ 8.00
$ 3.00
$ 12.00
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