Atlas Steel Company produces three grades of steel: high, good,and regular grade
ID: 2457908 • Letter: A
Question
Atlas Steel Company produces three grades of steel: high, good,and regular grade. Each of these products (grades) has highdemand in the market, and Atlas is able to sell as much as it canproduce of all three. The furnace operation is a bottleneck inthe process and is running at 100% of capacity. Atlas wants toimprove steel operation profitability. The variable conversioncost is $6 per process hour. The fixed cost is$1,530,000. In addition, the cost analyst was able todetermine the following information about the three products:
HighGrade GoodGrade Regular Grade
Budgeted unitsproduced 6,000 6,000 6,000
Total process hours perunit 15 15 12
Furnace hours perunit 5 3 2
Unit sellingprice $375 $350 $320
Direct materials cost perunit $160 $140 $130
The furnace operation is part of the total process for each ofthese three products. Thus, for example, 5 of the 15 hoursrequired to process High Grade steel are associated with thefurnace.
Instructions:
Note: 1. High Grade is $125
Explanation / Answer
Unit contribution Margin Highgrade Goodgrade Regular grade Sales price 375 Salesprice 350 Salesprice 320 -DM 160 - DM 140 - DM 130 DL 90 250 DL 90 DL 72 202 (15*6) (15*6) 230 (12 *6) CM 125 CM 120 CM 118 Part 2 - not sure how to do. Part -3 Regular grade profitability CM x 100 SP 118 x 100 320 = 36.875 % The management wishes to improve profitability on the other two asthe same relative profit of this one. So, 1. For high grade Selling price - variable costs = 0.36875 S S - 250 = 0.36875 S Solve the equation, S-0.36875S = 250 S = 250 / .6125 selling price is $ 408.00 2. For good grade S - 0.36875 = 230 S = 230 / .6125 = $ 375.51
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