Product Decisions Under Bottlenecked Operations
Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $85,000 for the company as a whole. In addition, the following information is available about the three products:
Large Medium Small
Unit selling price $184 $160 $100
Unit variable cost 130 120 76
Unit contribution margin $ 54 $ 40 $ 24
Autoclave hours per unit 3 2 1
Total process hours per unit 5 4 2
Budgeted units of production 3,000 3,000 3,000
a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production.
Large Medium Small Total
Units produced
Revenues $ $ $ $
Less: Variable costs
Contribution margin $ $ $ $
Less: Fixed costs
Income from operations $
b. Prepare an analysis showing which product is the most profitable per bottleneck hour.
Large Medium Small
Contribution margin $ $ $
Autoclave hours per unit
Unit contribution margin per production bottleneck hour $ $ $

Answer and Explanation:

a. The computation of contribution margin and income from operations is shown below:-

Particulars                   Large         Medium              Small           Total

Units produced           3,000           3,000            3,000           9,000

Revenues  a             $5,52,000      $4,80,000      $3,00,000    $13,32,000

                           (3,000 × $184)   (3,000 × $160) (3,000 × $100)

Less:

Variable costs b     $3,90,000       $3,60,000      $2,28,000       $9,78,000

                           (3,000 × $130)   (3,000 × $120) (3,000 × $76)

Contribution margin $162,000   $1,20,000          $72,000         $3,54,000

c = (a - b)

Less: Fixed costs d                                                                         $85,000

Income from operations                                     2,69,000

(d = c - d)

b. The preparation of most profitable per bottleneck hour is shown below:-

Particulars                      Large              Medium            Small        

Contribution margin a   $54                  $40                    $24

Autoclave hours  

per unit b                          3.00                  2.00                 1.00  

Unit contribution margin per production

bottleneck hour            18                       20                   24

(a ÷ b)