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 $12 per process hour. The fixed cost is $479,000. 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	14		12		9
Furnace hours per unit	3		4		5
Unit selling price	$296		$253		$270
Direct materials cost per unit	$110		$105		$97

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.

	Contribution Margin Per Unit
High Grade	$
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	$

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