Atlas Steel Company produces three grades of steel: high, good, and regular grad

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 $14 per process hour. The fixed cost is $452,000. 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, 5 of the 16 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 3,000 3,000 3,000 Total process hours per unit 16 14 11 Furnace hours per unit 5 3 4 Unit selling price $367 $314 $303 Direct materials cost per unit $113 $106 $97

Explanation / Answer

Calculate contribution margin per unit :

Calculate contribution margin per hour :

High grade Good grade regular grade selling price per unit 367 314 303 Direct material price per unit (113) (106) (97) Conversion cost per unit (224) (196) (154) Contribution margin per unit 30 12 52

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