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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 $10 per process hour. The fixed cost is $495,000. 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 17 hours required to process High Grade steel are associated with the furnace.

1. Determine the unit contribution margin for each product.

High Grade 5,000 17 Good GradeRegular Grade 5,000 12 Budgeted units produced Total process hours per unit Furnace hours per unit Unit selling price Direct materials cost per unit 15 4 $269 $107 $305 $254 $110 $98