ExerLight produces two types of exercise treadmills: Regular and Deluxe. The exe

Question

ExerLight produces two types of exercise treadmills: Regular and Deluxe. The exercise craze is such that Exerlight could use all of its available machine hours producing either model The two models are processed through the same production department. (® (Click the icon to view the data.) Requirement What product mix will maximize operating income? Prepare the product mix analysis. ExerLight should produce the product with the contribution margin per unit of the constraint. times as much overhead cost is allocated to each Deluxe model as to each Regular model. In other words, it takes times as many machine hours to produce a Deluxe model. For each unit of the Deluxe model produced (contributing $ Square to operating income). ExerLight can produce units of the Regular model (contributing $ Square to operating income). Therefore. ExerLight should produce

Explanation / Answer

Contribution Per Macine hour Analysis Deluxe Regular Sale Price 1020 560 Less: Variable Costs Direct materials 290 90 Direct Labor 88 186 Variable MOH 160 80 Variable Op.Exp. 111 63 Total Variable expenses 649 419 Contribution 371 141 Machine hrs. used in the ratio of 88:44 ie. 2:1 Contribution /M/c hr. 185.5 141 Exer Light should produce the product Deluxe with the contribution margin 185.5 per unit of the constraint, ie,Machine hour (higher Contribution per unit of the constraint) 2 times as much OH cost is allocated to each Deluxe model when compared to each Regular model.It takes 2 times as many machine hours to produce a Deluxe model. For each unit of Deluxe model produced contributing ($ 185.5*2=$ 371)to the Operating Income Exer Light can produce 2 units of the Regular model contributing ($ 141 )to the Operating Income Therefore ExerLight should produce the Deluxe Model which contributes the maximiu to the Operating Income- under the given constraint ie. Machine hours- to maximise profits.

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