Contribution Margin per Constraint Chavez Chemical Company produces three produc

Question

Contribution Margin per Constraint Chavez Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Chavez Chemical is able to sell as much as it can produce of all three. The reaction operation is a bottleneck in the process and is running at 100% of capacity. Chavez Chemical wants to improve chemical operation profitability. The variable conversion cost is $20 per process hour. The fixed cost is $550,000. In addition, the cost analyst was able to determine the following information about the three products: Ethylene Butane Ester Budgeted units produced Total process hours per unit Reactor hours per unit Unit selling price Direct materials cost per unit 180 130 15,000 15,000 15,000 0.5 $250 $90 1.0 0.8 $400 $350 The reaction operation is part of the total process for each of these three products. Thus, for example, 1.0 of the 6 hours required to process ethylene is associated with the reactor.

Explanation / Answer

Reaction Operations Bottleneck Variable Conversion Cost 20 Per Process Hour Fixed Cost 550000 Particulars Ethylene Butane Ester Budgeted Units 15000 15000 15000 Total Process Hours PU 6 6 4 Reactors Hour PU 1 0.8 0.5 Other than Reactor hour PU 5 5.2 3.5 Unit SP 400 350 250 DM Cost 180 130 90 1 Contribution Margin PU: Particulars Ethylene Butane Ester Unit SP 400 350 250 Less: DM Cost 180 130 90 Less: Variable Con Cost 120 120 80 (Total Hours*20) Contribution Margin PU: 100 100 80 2 Contribution Margin PU for Bottleneck: Particulars Ethylene Butane Ester Contribution Margin before Bottleneck 100 100 80 Reactors Hour PU 1 0.8 0.5 Contribution Margin PU for Reactor Hour 100 125 160 Ranking III II I 3 Revised Price for Ethylene: Contribution Margin of Ester= (Revised Price-Variable Cost for Ethylene)/Reactor Time PU for Ethylene 160= (Revised Price-300)/1 Revised Price 460 Revised Price for Butane: Contribution Margin of Ester= (Revised Price-Variable Cost for Butune)/Reactor Time PU for Butune 160= (Revised Price-250)/0.8 Revised Price 378

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