Product Pricing and Profit Analysis with Bottleneck Operations Atlas Steel Compa

Question

Product Pricing and Profit Analysis with Bottleneck Operations Atlas Steel Company produces three grades of steel: high, good, and regular grade. Each of these products (grades) has high demand in the market, and Atlas 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. Atlas wants to improve steel operation profitability. The variable conversion cost is $16 per process hour. The fixed cost is $421,000. In addition, the cost analyst was able to determine the following information about the three products: The furnace operation is part of the total process for each of these three products. Thus, for example, 5 of the 17 hours required to process High Grade steel are associated with the furnace. Determine the unit contribution margin for each product. Contribution Margin Per Unit High Grade $ Good Grade $ Regular Grade $ 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 $

Explanation / Answer

(1)

Unit variable cost = Direct material + Total Processing cost

High grade: $114 + $16 x 17 = $(114 + 272) = $386

Good grade: $106 + $16 x 15 = $(106 + 240) = $346

Regular grade: $97 + $16 x 12 = $(97 + 192) = $289

Contribution margin = Selling price - Unit variable cost

High grade: $(421 - 386) = $35

Good grade = $(349 - 346) = $3

Regular grade: $(337 - 289) = $48

(2) Contribution margin per furnace hour:

High grade: $35 / 5 = $7

Good grade: $3 / 3 = $1

Regular grade: $38 / 4 = $12

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