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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 1,030610

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 129113

*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

Expert verified

The company should produce regular treadmills forprofit maximization.

Step by step solution

01

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.

02

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.

03

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

04

Decisionon product mix

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

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Most popular questions from this chapter

When should special pricing orders be accepted?

StoreAll produces plastic storage bins for household storage needs. The company makes two sizes of bins: large (50 gallon) and regular (35 gallon). Demand for the products is so high that StoreAll can sell as many of each size as it can produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 3,300 hours per period. StoreAll can produce 10 large bins every hour, whereas it can produce 17 regular bins in the same amount of time. Fixed costs amount to \(115,000 per period. Sales prices and variable costs are as follows:

Regular Large

Sales price per unit \)8.00 $10.40

Variable cost per unit 3.50 4.40

Requirements

1. Which product should StoreAll emphasize? Why?

2. To maximize profits, how many of each size bin should StoreAll produce?

3. Given this product mix, what will the companyโ€™s operating income be?

Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:

Direct materials \(5.00

Direct labor 3.00

Variable overhead 6.00

Fixed overhead 7.00

Manufacturing product cost \)21.00

Another company has offered to sell Cool Systems the switch for $15.00 per unit. If Cool Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable.

Prepare an outsourcing analysis to determine whether Cool Systems should make or buy the switch.

What are sunk costs? Give an example.

McCollum Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.

MCCOLLUM COMPANY

Income Statement

Month Ended June 30, 2018

Total Product A Product B

Net Sales Revenue 150,00075,000 \(75,000

Variable Costs 90,000 55,000 35,000

Contribution Margin 60,000 20,000 40,000

Fixed Costs 50,000 5,000 45,000

Operating Income/(Loss) \)10,000 15,000(5,000)

  1. If fixed costs cannot be avoided, should McCollum drop Product B? Why or why not?
  2. If 50% of Product Bโ€™s fixed costs are avoidable, should McCollum drop Product B? Why or why not?
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