Rex Steel Company produces three grades of steel: High, Good, andRegular Grade.

Question

Rex Steel Company produces three grades of steel: High, Good, andRegular Grade. Each of these products (grades) has high demand inthe market, and Rex is able to sell as much as it can produce ofall three. The furnace operation is a bottleneck in the process andis running at 100% of capacity. Rex wants to improve steeloperation profitability. The variable conversion cost is $6 perprocess hour. The fixed cost is $1,530,000. In addition, the costanalyst was able to determine the following information about thethree products:

                                         HighGrade        GoodGrade       Reg. Grade
Budgeted unitsproduced            6,000                6,000               6,000
Total process hours perunit       15                     15                   12
Furnace hours perunit               5                      3                    2
Unit sellingprice                        $375                $350               $320
Direct Materials cost per unit      $160                $140               $130

The furnace operation is part of the total process for each ofthese three products. Thus, for example, 5 of the 15 hours requiredto 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 productprofitabilities, assuming that the furnace is a bottleneck.
3. Assume that management wishes to improve profitability byincreasing prices on selected products. At what price would Highand Good Grades need to be offered in order to produce the samerelative profitability as Regular Grade steel?

Any Lifesaver, can you please help me out with this. Muchappreciate, thanks!

- Parisa

Explanation / Answer

Any lifesaver, I need this by tonight! Please help. - Parisa

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