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

First, calculate the contribution margin per unit for each lamp: Bedford Lamp = $25 - $17 = $8, Lowell Lamp = $35 - $23 = $12. Then, calculate the contribution margin per machine hour: Bedford Lamp = $8 / 2 hours = $4/hour, Lowell Lamp = $12 / 4 hours = $3/hour. Given the machine hour capacity of 25,000 hours, prioritize the product with the higher contribution margin per machine hour, which is the Bedford Lamp. Maximize production of Bedford Lamps first: 8000 units * 2 hours = 16,000 hours. Remaining capacity for Lowell Lamps: 25,000 - 16,000 = 9,000 hours. Number of Lowell Lamps = 9,000 hours / 4 hours per lamp = 2250 lamps. Therefore, the mix of 8000 Bedford Lamps and 2250 Lowell Lamps utilizes the full capacity and maximizes the contribution margin.

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