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 $14 per process hour. The fixed cost is $405,000. In addition, the cost analyst was able to determine the following information about the three products:

The furnace operation is part of the total process for each of these three products. Thus, for example, 4 of the 14 hours required to process High Grade steel are associated with the furnace.

1. Determine the unit contribution margin for each product.

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

    High Grade     Good Grade     Regular Grade Budgeted units produced 5,000 5,000 5,000 Total process hours per unit 14 12 9 Furnace hours per unit 4 5 3 Unit selling price $327 $283 $254 Direct materials cost per unit $111 $105 $98

Explanation / Answer

Contribution Margin Per Unit 1)     High Grade     Good Grade     Regular Grade Budgeted units produced 5,000 5,000 5,000 Total process hours per unit 14 12 9 Furnace hours per unit 4 5 3 Unit selling price $327 $283 $254 Direct materials cost per unit $111 $105 $98 Variable cost per hour 14 14 14 Direct materials cost per unit $111 $105 $98 variable cost(hour*rate per hour)-labor 196 168 126 Total variable cost(material+labor) $307 $273 $224 unit contribution margin(selling-total variable cost) $20 $10 $30 2) Contribution Margin Per Furnace Hour Contribution Margin- from above 20 10 30 Furnace hours per unit 4 5 3 contribution margin per furnance hour 5 2 10

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.