Clay Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp. The following per unit data are available: Total fixed costs are $30,000. Marketing data indicate that the company can sell up to 8,000 units of the Bedford lamp and up to 4,000 units of the Lowell lamp. Machine hour capacity is 25,000 hours per year. What product mix will deliver the optimum operating income?

Question

Clay Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp. The following per unit data are available:  Total fixed costs are $30,000. Marketing data indicate that the company can sell up to 8,000 units of the Bedford lamp and up to 4,000 units of the Lowell lamp. Machine hour capacity is 25,000 hours per year. What product mix will deliver the optimum operating income?

Quizplus · Accepted Answer

To determine the optimum operating income, we need to calculate the contribution margin per machine hour for each product:

- Bedford Lamp: $70 contribution margin / 0.5 machine hours = $140 contribution margin per machine hour
- Lowell Lamp: $50 contribution margin / 0.3 machine hours = $166.67 contribution margin per machine hour

Based on these calculations, we can see that producing more Lowell Lamps will yield a higher contribution margin per machine hour. However, we also need to consider the market demand and the machine hour capacity.

If we produce only Lowell Lamps, we would be able to produce 12,500 units (25,000 machine hours / 2 machine hours per Lowell Lamp), but we would exceed the maximum market demand of 4,000 units. Therefore, option B is not feasible.

If we produce only Bedford Lamps, we could produce up to 16,000 units (25,000 machine hours / 1.5 machine hours per Bedford Lamp), which also exceeds the maximum market demand of 8,000 units. Therefore, option A is not feasible.

To maximize operating income within the constraints, we need to produce fewer Bedford Lamps and more Lowell Lamps. By producing 8,000 Bedford Lamps and 2,250 Lowell Lamps, we would use a total of 13,125 machine hours (8,000 x 0.5 + 2,250 x 0.3), leaving us with 11,875 unused machine hours. This product mix also falls within the market demand constraints for both products. Therefore, option C is the best choice.

Clay Corporation Manufactures Two Styles of Lamps-A Bedford Lamp and a Lowell