product pricing and profit analysis with bottleneck operation

16 14 11 Product Pricing and Profit Analysis with Bottleneck Operations 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 $16 per process hour. The fixed cost is $514,000. In addition, the cost analyst was able to determine the following information about the three products: High Grade Good Grade Regular Grade Budgeted units produced 4,000 4,000 4,000 Total process hours per unit Furnace hours per unit 3 5 Unit selling price $343 $331 > Direct materials cost per unit $114 $107 $95 The furnace operation is part of the total process for each of these three products. Thus, for example, 4 of the 16 hours required to process High Grade steel are assocated with the furnace. 1. Determine the urut contribution margin for each product. Contribution Margin Per Unit High Grade 4 $398 Good Grade Regular Grade 2. Provide an analysis to determine the relative product profitability, assuming that the furnace is a bottleneck Contribution Margin Per Furnace Hour High Grade Good Grade Regular Grade