Atlas Steel Company produces three grades of steel: high, good,and regular grade. Each of these products (grades) has highdemand in the market, and Atlas is able to sell as much as it canproduce of all three. The furnace operation is a bottleneck inthe process and is running at 100% of capacity. Atlas wants toimprove steel operation profitability. The variable conversioncost is $6 per process hour. The fixed cost is$1,530,000. In addition, the cost analyst was able todetermine the following information about the three products:
HighGrade GoodGrade Regular 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 perunit $160 $140 $130
The furnace operation is part of the total process for each ofthese three products. Thus, for example, 5 of the 15 hoursrequired to process High Grade steel are associated with the furnace.
Instructions:
- Determine the unit contribution margin for eachproduct.
- Provide an analysis to determine the relative product profit abilities, assuming that the furnace is abottleneck.
- Assume that management wishes to improve profitabilityby increasing prices on selected products. At what price wouldHigh and Good grades need to be offered in order to produce thesame relative profitability as Regular Grade steel?