PR 11-5A Product pricing and profit analysis with bottleneck operations Obj. 3 Hercules Steel Company produces three grades of steel: high, good, and regular grade. Each of these products (grades) has high demand in the market, and Hercules 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. Hercules wants to improve steel operation profitability. The variable conversion cost is $15 per process hour. The fixed cost is $200,000. In addition, the cost analyst was able to determine the following information about the three products: Budgeted units produced Total process hours per unit Furnace hours per unit Unit selling price Direct materials cost per unit High Grade 5,000 12 4 $280 $90 Good Grade 5,000 11 3 $270 $84 Regular Grade 5,000 10 2.5 $250 $80 The furnace operation is part of the total process for each of these three products. Thus, for example, 4.0 of the 12.0 hours required to process High Grade steel are associated with the furnace. Instructions 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. 1. Selling price Variable conversion cost per unit Direct materials cost per unit Total cost per unit Contribution margin per unit High Good Regular Grade Grade Grade $ 280 270 250 $ (180) $ (165) EA $ (150) (90) (84) (80) $ 10 21 $ 20 2. High Good Regular Grade Grade Grade Contribution margin per unit $ 10.00 $ 21.00 $ 20.00 Divided by furnace (bottleneck) hours per unit 4.0 3.0 2.5 Contribution margin per furnace hour $ 2.50 $ 7.00 $ 8.00 [Key essay answer here]