Question

Product Pricing and Profit Analysis with Bottleneck Operations

Hercules 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 $14 per process hour. The fixed cost is $513,000. 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	16		14		11
Furnace hours per unit	4		5		3
Unit selling price	$370		$316		$291
Direct materials cost per unit	$110		$105		$98

The furnace operation is part of the total process for each of these three products. Thus, for example, 4 of the 16 hours required to process High Grade steel are associated with the furnace.

1. Determine the unit contribution margin for each product. If required, round your answers to two decimal places.

	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	$

Accepting Business at a Special Price

Forever Ready Company expects to operate at 88% of productive capacity during July. The total manufacturing costs for July for the production of 29,920 batteries are budgeted as follows:

Direct materials	$402,800
Direct labor	148,100
Variable factory overhead	41,516
Fixed factory overhead	83,000
Total manufacturing costs	$675,416

The company has an opportunity to submit a bid for 2,000 batteries to be delivered by July 31 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal production during July or increase the selling or administrative expenses.

What is the unit cost below which Forever Ready Company should not go in bidding on the government contract? Round your answer to two decimal places.
$__________per unit

Answer 1

Conclusion:

The Unit cost below which Forever ready company should not go is $ 19.80. This is the Minimum price ($ 19.80) to be quoted to accept the bid of 2000 batteries to be given on a contract to government agency.

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