Problem #4. Making product mix decisions_Lifemaster produces

Problem #4. Making product mix decisions

Lifemaster produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Lifemaster 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:    2. CM per MHr, Regular $387

                                                                                                            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.