Clay Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp. The following per unit data are available: $$\begin{array} { | l | r | r | }
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sale price } & \$ 25 & \$ 35 \
\hline \text { Variable costs } & \$ 17 & \$ 23 \
\hline \text { Machine hours required for 1 lamp } & 2 & 4 \
\hline
\end{array}$$ Total fixed costs are $30,000, and Clay can sell a maximum of 10,000 units of each style of lamp annually. 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: $$\begin{array} { | l | r | r | } 
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sale price } & \$ 25 & \$ 35 \
\hline \text { Variable costs } & \$ 17 & \$ 23 \
\hline \text { Machine hours required for 1 lamp } & 2 & 4 \
\hline
\end{array}$$ Total fixed costs are $30,000, and Clay can sell a maximum of 10,000 units of each style of lamp annually. Machine hour capacity is 25,000 hours per year.
- What product mix will deliver the optimum operating income?

Quizplus · Accepted Answer

To maximize operating income, prioritize the product with the highest 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, produce as many Bedford Lamps as possible within the machine hour capacity, then use remaining capacity for Lowell Lamps.

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