Question

Lifemaster produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Lifemaste 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:

Per Unit
Deluxe Regular
Sale Price $ 1,020 $ 560
Costs:
Direct Material 300 90
Direct Labor 88 188
Variable Manufacturing Overhead 264 88
Fixed Manufacturing Overhead* 138 46
Variable Operating Expenses 111 65
Total Costs 901 477
Operating Income $ 119 $ 83
*allocated on the basis of machine hours
Requirements
1. What is the constraint?
2. Which model should Lifemaster produce? (Hint: Use the allocation of fixed manufacturing overhead to determine the proportion of machine hours used by each product.)
3. If Lifemaster should produce both models, compute the mix that will maximize operating income.

Answer 1

1. Machine hours is the Constraints in the given case.

2. Evaluation of Products

Deluxe Regular

Sales Price $1,020 $560

Less: Direct Material $300 $90

Less: Direct Labor $88 $188

Less: Variable Manufacturing $264 $88

Overhead

Less: Variable Operating $111 $65

Expenses

Contribution Margin $257 $129

Contribution Margin as % 292.05% 68.62%

of Direct Labor cost

Conclusion: Hence it is better to produce Deluxe as it gives higher contribution margin as a % of direct labor cost

Workings

Contribution Margin as % of Direct Labor cost

Deluxe = 257/88% = 292.05%

Regular = 129 /188% = 68.62%