Misbah Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available: $$\begin{array} { | l | r | r | }
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sales price } & \$ 25 & \$ 35 \
\hline \text { Variable costs } & \$ 17 & \$ 23 \
\hline \text { Machine hours required for one lamp } & 2 & 4 \
\hline
\end{array}$$ Total fixed costs are $60,000.Marketing data indicate that the company can sell up to 8000 units of the Bedford Lamp and up to 4000 units of the Lowell Lamp.Machine hour capacity is 25,000 hours per year.Which product mix will deliver the optimum operating income?

Question

Misbah Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available: $$\begin{array} { | l | r | r | } 
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sales price } & \$ 25 & \$ 35 \
\hline \text { Variable costs } & \$ 17 & \$ 23 \
\hline \text { Machine hours required for one lamp } & 2 & 4 \
\hline
\end{array}$$ Total fixed costs are $60,000.Marketing data indicate that the company can sell up to 8000 units of the Bedford Lamp and up to 4000 units of the Lowell Lamp.Machine hour capacity is 25,000 hours per year.Which product mix will deliver the optimum operating income?

Quizplus · Accepted Answer

To maximize operating income, prioritize products with higher contribution margin per machine hour. Bedford Lamp has a contribution margin of $8 and requires 2 hours, giving $4 per hour. Lowell Lamp has a contribution margin of $12 and requires 4 hours, giving $3 per hour. Thus, prioritize Bedford Lamps. Produce 8000 Bedford Lamps (16,000 hours) and 2250 Lowell Lamps (9,000 hours) to utilize the 25,000-hour capacity.

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