Wilmington Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Wilmington Chemical is able to sell as much as it can produce of all three. The reaction operation is a bottleneck in the process and is running at 100% of capacity. Wilmington wants to improve chemical operation profitability. The variable conversion cost is $10 per process hour. The fixed cost is $400,000. In addition, the cost analyst was able to determine the following information about the three products:
The reaction operation is part of the total process for each of these three products. Thus, for example, 1.5 of the 4.0 hours required to process ethylene is associated with the reactor. Budgeted Units Produced: Ethy 9000 Butane 9000 Ester 9000 Total Process Hours Per Unit: Ethy 4.0 Butane 4.0 Ester 3.0 Reactor Hours Per Unit: Ethy 1.5 Butane 1.0 Ester 0.5 Unit Selling Price: Ethy $170 Butane $155 Ester$130 Direct Material Cost Per Unit Ethy $115 Butane $88 Ester $85
Required: 1. Determine the unit contribution margin for each product. Contribution Margin Per Unit Ethylene $ Butane $ Ester $ 2. Provide an analysis to determine the relative product profitabilities, assuming that the reactor is a bottleneck. Contribution Margin Per Reactor Hour Ethylene $ Butane $ Ester $