Product Pricing and Profit Analysis with Bottleneck Operations Atlas Steel Compa
ID: 2582242 • Letter: P
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 $482,000. 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, 3 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 3 5 4 Unit selling price $326 $288 $273 Direct materials cost per unit $112 $105 $99Explanation / Answer
High Grade Good Grade Regular Grade Unit selling price 326 288 273 Direct materials cost per unit 112 105 99 Variable conversion cost 196 168 126 Contribution Margin Per Unit 18 15 48 2 High Grade Good Grade Regular Grade Contribution Margin Per Unit 18 15 48 Furnace hours per unit 3 5 4 Contribution Margin Per Furnace Hour 6 3 12
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