Leggero Corporation manufactures two styles of lamps - Bedford Lamp and Lowell Lamp. The following per unit data are available:
$$\begin{array} { | l | r | r | }
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sales price } & \$ 20 & \$ 36 \
\hline \text { Variable costs } & \$ 5 & \$ 10 \
\hline \text { Machine hours required for one lamp } & 3 & 8 \
\hline
\end{array}$$ Total fixed costs are $46,000, and the machine hour capacity is 30,000 hours per year. The Lowell Lamp has the highest contribution margin per unit and also has the highest contribution margin per machine hour, so the company should focus sales on the Lowell Lamp.

Question

Leggero Corporation manufactures two styles of lamps - Bedford Lamp and Lowell Lamp. The following per unit data are available:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sales price } & \$ 20 & \$ 36 \
\hline \text { Variable costs } & \$ 5 & \$ 10 \
\hline \text { Machine hours required for one lamp } & 3 & 8 \
\hline
\end{array}$$ Total fixed costs are $46,000, and the machine hour capacity is 30,000 hours per year. The Lowell Lamp has the highest contribution margin per unit and also has the highest contribution margin per machine hour, so the company should focus sales on the Lowell Lamp.

Quizplus · Accepted Answer

The contribution margin per unit for each lamp is calculated as sales price minus variable costs. For the Bedford Lamp, it's $20 - $5 = $15, and for the Lowell Lamp, it's $36 - $10 = $26, indicating the Lowell Lamp has the highest contribution margin per unit. However, to determine the contribution margin per machine hour, we divide the contribution margin per unit by the machine hours required for one lamp. For the Bedford Lamp, it's $15 / 3 = $5 per machine hour, and for the Lowell Lamp, it's $26 / 8 = $3.25 per machine hour. Therefore, the Bedford Lamp has the higher contribution margin per machine hour, not the Lowell Lamp.

Leggero Corporation Manufactures Two Styles of Lamps - Bedford Lamp