Ridley 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 $40,000.Marketing data indicate that the company can sell up to 6,000 units of the Bedford Lamp and up to 6,000 units of the Lowell Lamp.Machine hour capacity is 25,000 hours per year.Which product mix will deliver the optimum operating income?

Question

Ridley 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 $40,000.Marketing data indicate that the company can sell up to 6,000 units of the Bedford Lamp and up to 6,000 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 the product with the highest contribution margin per machine hour. Bedford Lamp has a contribution margin of $8 ($25 - $17) and requires 2 hours, giving $4 per hour. Lowell Lamp has a contribution margin of $12 ($35 - $23) and requires 4 hours, giving $3 per hour. Produce 6,000 Bedford Lamps (12,000 hours) and use remaining 13,000 hours for 3,250 Lowell Lamps.

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