Product pricing and profit analysis with bottleneck operations Delaware Bay Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Delaware Bay 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.Delaware Baywants to improve chemical operation profitability. The variable conversion cost is $7 per process hour. The fixed cost is $550,000. In addition, the cost analyst was able to determine the following information about the three products: Ethylene Butane Ester Budgeted units produced 9000 9,000 9,000 Total process hours per unit 3 3 2 Reactor hours per unit 1 0.8 0.5 Unit selling price $165 $128 $115 Direct materials cost per unit $110 $75 $85 The reaction operation is part of the total process for each of these three products. Thus, for example, 1.0 of the 3 hours required to process ethylene are associated with the reactor. Instructions: 1. Determine the unit contribution margin for each product. 2. Provide an analysis to determine the relative product profitability, assuming that the reactor is a bottleneck. 3. Assume that management wishes to improve profitability by increasing prices on selected products. At what price would ethylene and ester need to be offered in order to produce the same relative profitability as butane?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Product pricing and profit analysis with bottleneck operations
Delaware Bay Chemical Company produces three products: ethylene, butane, and ester.
Each of these products has high demand in the market, and Delaware Bay 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.Delaware Baywants to improve chemical operation profitability. The variable conversion cost is $7 per process hour. The fixed cost is $550,000. In addition, the cost analyst was able to determine the following information about the three products:
|
Ethylene
|
Butane
|
Ester
|
|
|
Budgeted units produced
|
9000
|
9,000
|
9,000
|
|
Total process hours per unit
|
3
|
3
|
2
|
|
Reactor hours per unit
|
1
|
0.8
|
0.5
|
|
Unit selling price
|
$165
|
$128
|
$115
|
|
Direct materials cost per unit
|
$110
|
$75
|
$85
|
The reaction operation is part of the total process for each of these three products. Thus, for example, 1.0 of the 3 hours required to process ethylene are associated with the reactor.
Instructions:
1. Determine the unit contribution margin for each product.
2. Provide an analysis to determine the relative product profitability, assuming that the reactor is a bottleneck.
3. Assume that management wishes to improve profitability by increasing prices on selected products. At what price would ethylene and ester need to be offered in order to produce the same relative profitability as butane?
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