Product Pricing and Profit Analysis with Bottleneck Operations Atlas Steel Compa

Question

Product Pricing and Profit Analysis with Bottleneck Operations

Atlas Steel Company produces three grades of steel: high, good, and regular grade. Each of these products (grades) has high demand in the market, and Atlas 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. Atlas wants to improve steel operation profitability. The variable conversion cost is $10 per process hour. The fixed cost is $472,000. In addition, the cost analyst was able to determine the following information about the three products:

Explanation / Answer

1.

Particulars High grade Good grade Regular grade

units 5000 5000 5000

selling price *278 *230 *236

Sales 1390000 1150000 1180000

Direct material cost (555000) (525000) (490000)

Contribution 835000 625000 690000

Contribution margin per unit 167 125 138

2.

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