Question

Tread Light produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Tread Light could use all its available machine hours to produce either model. The two models are processed through the same production departments. Data for both models are as follows:

Per Unit

Deluxe Regular

Sales price \(1,030 \)610

Costs:

Direct materials 320 130

Direct labor 88 180

Variable manufacturing overhead 270 90

Fixed manufacturing overhead* 102 34

Variable operating expenses 121 63

Total costs 901 497

Operating income \(129 \)113

*allocated on the basis of machine hours

Requirements

1. What is the constraint?

2. Which model should Tread Light produce? (Hint: Use the allocation of fixed manufacturing overhead to determine the proportion of machine hours used by each product.)

3. If Tread Light should produce both models, compute the mix that will maximize operating income.

Short answer

The company should produce regular treadmills forprofit maximization.

Step-by-step solution

Meaning of Contribution Margin

Acontribution margin represents the profit left with acompany after recovering all the variable costs from the sales revenue generated by a business entity. It is computed by taking the difference betweennet sales revenues and associatedvariable costs.

Identification of constraint

In the given set of data, machine hours are the major constraint in the company because the production process is dependent on themachine hours.

Computation of per-unit contribution margin

Particulars	Deluxe ($)	Regular ($)
Selling price per treadmill	1,030	610
Less: Variable cost	(799)	(463)
Contribution margin per unit	231	147
Machine hours used in proportion of $102:34	3.00	1.00
Hence, units produced per hour	1.00	3.00
Contribution margin per machine hour
Proportion of units produced per equivalent hour (A)	1	3
Contribution margin per unit (B)	231	147
Contribution margin per equivalent machine hour (A*B)	$231	$441

Decisionon product mix

The company should produce 100% regular treadmills with zero deluxe because it will provide ahigher contribution margin per machine hour.