Product Decisions Under Bottlenecked Operations

Mill Metals Inc. has three grades of metal product, Type 5, Type 10, and Type 20. Financial data for the three grades are as follows:

Type 5 Type 10 Type 20

Revenues $43,000 $49,000 $56,500

Variable cost $34,000 $28,000 $26,500

Fixed cost 8,000 8,000 8,000

Total cost $42,000 $36,000 $34,500

Income from operations $ 1,000 $13,000 $22,000

Number of units ÷ 5,000 ÷ 5,000 ÷ 5,000

Income from operations per unit $ 0.20 $ 2.60 $ 4.40

Mill's operations require all three grades to be melted in a furnace before being formed. The furnace runs 24 hours a day, 7 days a week, and is a production bottleneck. The furnace hours required per unit of each product are as follows:

Type 5: 6 hours

Type 10: 6 hours

Type 20: 12 hours

The Marketing Department is considering a new marketing and sales campaign.

Which product should be emphasized in the marketing and sales campaign in order to maximize profitability?

Determining the unit contribution margin per furnace hour will assist in making your decision. Round the unit contribution margin to two decimal places.

Unit contribution margin per furnace hour

Type 5

Type 10

Type 20