Treadlight produces two types of exercise treadmills: regular and deluxe. The ex

Question

Treadlight produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that TreadLight 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 is as follows:

Sale Price: Deluxe per unit ($1,010), Regular per unit ($560)

Costs:

Direct materials: deluxe per unit ($320), Regular per unit ($90)

direct labor: deluxe per unit ($82), regular per unit ($184)

variable manufacturing overhead: deluxe per unit ($240), regular per unit ($80)

fixed manufacturing overhead *: deluxe per unit ($126), regular per unit ($42)

variable operating expenses: deluxe per unit ($117) , regular per unit ($69)

total cost: deluxe per unit ($885), regular per unit ($465)

operating income: deluxe per unit ($125), regular per unit ($95)

*allocated on the basis of machine hours

a. Which model should Treadlight produce? (Hint: TreadLight can produce either 1 deluxe treadmill or 3 regular treadmills per machine hour.)

Prepare the product mix analysis

Treadlight

Product Mix Analysis

Sales price per unit: deluxe:_______,regular:________

variable costs per unit:deluxe:______,regular:_______

contribution margin per unit: deluxe:______,regular:______

units that can be produced each machine hour: deluxe:______, regular:_______

contribution margin per machine hour: deluxe:______, regular:_______

b. Should Treadlight produce both models? If so, compute the mix that will maximize operating income.

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Members of the board of directors of Safety Step have received the following operating income data for the year ended May 31,2012 :

Safety Step

income statement

For the year ended May 31, 2012

Sales Revenue: Product line industrial systems ($350000), product line household systems ($360,000), total ($710,000)

cost of goods sold:

variable: product line industrial systems (34000), product line household systems (47,000), total (81,000)

fixed: product line industrial systems (230,000), product line household systems (69,000), total (299,000)

total cost of goods sold: product line industrial systems ($264000), product line household systems(116,000), total (380000)

gross profit: product line industrial systems ($86,000), product line household systems (244,000), total (330,000)

marketing and administrative expenses:

variable: product line industrial systems (69,000), product line household systems (76,000), total (145000)

fixed: product line industrial systems (41000), product line household systems (24,000), total (65,000)

total marketing administrative exp.: product line industrial systems (110,000), product line household systems (100,000),Total ($210,000)

operating income (loss): product line industrial systems (-$24,000), product line household systems ($144,000), total $120,000

Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $81,000 and decrease fixed marketing and administrative expenses by $14,000.

1. prepare an incremental analysis to show whether Safety Step should drop the industrial systems product line. fill in the blanks.

Safety Step

incremental analysis of dropping a product line

expected decrease in revenues--

dropping industrial systems sales ________

expected decrease in expenses:

variable expenses:

cost of goods sold ________

marketing and administrative expenses _________

fixed expenses:

cost of goods sold _________

marketing and administrative expenses __________

expected decrease in total expenses __________

__________(expected decrease or expected increase) in operating income _____________

2. Prepare contribution margin income statements to show Safety Step's total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line . Compare the difference between the two alternatives' income numbers to your answer to requirement 1.

3. What have you learned from the comparison in requirement 2?

Explanation / Answer

Q1

No company should produce only Deluxe trademill since the contribution per hour is more than regular. Producing deluxe will maximize the profit per hour.

Q2

B)

Part 3

710000 + (-24000 ) = 47,000 net income compared to 161000. hence it should drop the production of industrial system product line.

Deluxe Regular Sales $      1,010 $       560 Direct Material $         320 $         90 Direct labor $           82 $       184 Variable Manufacturing overhead $         240 $         80 Fixed manufacturing overhead $         126 $         42 Variable selling expenses $         117 $         69 Total cost per unit $         885 $       465 Profit $         125 $         95 Sales $      1,010 $       560 Direct Material $         320 $         90 Direct labor $           82 $       184 Variable Manufacturing overhead $         240 $         80 Variable selling expenses $         117 $         69 Total Variable cost $         759 $       423 Contribution per unit = Sales - variable cost $         251 $       137 units that can be produced each machine hour 1.00 3.00 contribution margin per machine hour $   251.00 $   45.67

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