De accepicu. P12-6 Product pricing and profit analysis with bottleneck operations Palomar Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Palomar 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. Palomar 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 15,000 15,000 15,000 Total process hours per unit Reactor hours per unit 1.0 0.8 0.5 Unit selling price $400 $350 $250 Direct materials cost per unit $180 $130 $90 The reaction operation is part of the total process for each of these products. Thus, for example, 1.0 of the 6 hours required to process ethyica associated with the reactor. Instructions 1. Determine the unit contribution margin for each of the three produce 2. Provide an analysis to determine the relative product profitabilities, that the reactor is a bottleneck. 3. Assume that management wishes to improve profitability by incrca on selected products. At what price would ethylene and butane offered in order to produce the same relative profitability as estern ct profitabilities, assuming by increasing prices ind butane need to be 35 AB C D E F G H I J K L One way to revise the pricing would be to increase the price to the point where all three products produce profitability equal to the highest profit product. This would be determined as follows: ilm Revised Price of Ethylene: Unit Contribution Margin per Reactor Hour for Ester Revised Price of Unit Variable Cost Ethylene of Ethylene Reactor Hours of Ethylene per Unit Revised Price of Ethylene Revised Price of Ethylene (Price required of Ethylene to deliver the same contribution margin per bottleneck hour as does ester.) Revised price of Ester: Unit Contribution Margin per Reactor Hour for Ester Revised Price of Unit Variable Cost Butane of Butane Reactor Hours of Butane per Unit Revised Price of Butane & 8888 68 BRENN Revised price of Butane (Price required of Butane to deliver the same contribution margin per bottleneck hour as does ester.) Pr. 12-6 Ready Type here to search