# Determine the unit contribution margin for each of the three products.

Differential analysis report involving opportunity costs
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On November 7, Five Star is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in \$900,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled:
Cost of equipment

\$900,000
Life of equipment

15 years
Estimated residual value of equipment

\$100,000
Yearly costs to operate the warehouse, excluding depreciation of equipment

\$175,000
Yearly expected revenues—years 1–7

\$400,000
Yearly expected revenues—years 8–15

\$250,000
Instructions

1. Prepare a report as of November 7, 2012, presenting a differential analysis of the proposed operation of the warehouse for the 15 years as compared with present conditions.
2. Based on the results disclosed by the differential analysis, should the proposal be accepted?
3. If the proposal is accepted, what is the total estimated income from operations

P12-6
Product pricing and profit analysis with bottleneck operations

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✓ 1. Ethylene contribution margin per unit, \$100
Palomar Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Palomar 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. Palomar Chemical wants to improve chemical operation profitability. The variable conversion cost is \$20 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:

The reaction operation is part of the total process for each of these three products. Thus, for example, 1.0 of the 6 hours required to process ethylene are associated with the reactor.
Instructions

1. Determine the unit contribution margin for each of the three products.
2. Provide an analysis to determine the relative product profitabilities, 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 butane need to be offered in order to produce the same relative profitability as ester?

I hope that is enough information to make a determination

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