Atlas Steel Company produces three grades of steel: high, good, and regular grad
ID: 2560064 • Letter: A
Question
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 $12 per process hour. The fixed cost is $397,000. 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 4,000 4,000 4,000 Total process hours per unit 14 12 9 Furnace hours per unit 4 5 3 Unit selling price $316 $257 $242 Direct materials cost per unit $112 $108 $98Explanation / Answer
1. Determine the unit contribution margin for each product. Product High Grade Good Grade Regular Grade $ $ $ Unit selling price 316 257 242 Variable costs per unit Direct materials cost per unit 112 108 98 Conversion cost per unit=Conversion costs per hour,$14 x Total process hours per unit 168 144 108 Total variable costs per unit 280 252 206 Unit contribution Margin for each product=Selling Price per unit-Total variable costs per unit 36 5 36 2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck. As Furnace Hours are the bottle neck the relative ranking of product profitability will be done on the basis of contribution margin per furnace hours used for each product Contribution Margin per furnace hours [A] 36 5 36 Furnace Hours per unit [B] 4 5 3 contribution margin per furnace hours used for each product= [A / B] 9 1 12 So the Ranking for relative product profitability on the basis of contribution margin per furnace hours used for each product Rank 2 Rank 3 Rank 1
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