Ridley Corporation manufactures two styles of lamps-a Bedford Lamp and a Lowell Lamp.The following per unit data are available: $$\begin{array} { | l | r | r | }
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sales price } & \$ 30 & \$ 35 \
\hline \text { Variable costs } & \$ 18 & \$ 23 \
\hline \text { Machine hours required for one lamp } & 2 & 4 \
\hline
\end{array}$$ Total fixed costs are $40,000.Marketing data indicate that the company can sell up to 8,000 units of the Bedford Lamp and up to 4,000 units of the Lowell Lamp.Machine hour capacity is 26,000 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: $$\begin{array} { | l | r | r | } 
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sales price } & \$ 30 & \$ 35 \
\hline \text { Variable costs } & \$ 18 & \$ 23 \
\hline \text { Machine hours required for one lamp } & 2 & 4 \
\hline
\end{array}$$ Total fixed costs are $40,000.Marketing data indicate that the company can sell up to 8,000 units of the Bedford Lamp and up to 4,000 units of the Lowell Lamp.Machine hour capacity is 26,000 hours per year.Which product mix will deliver the optimum operating income?

Quizplus · Accepted Answer

To determine the optimum product mix, we need to calculate the contribution margin per machine hour for each product and allocate machine hours accordingly.

The contribution margin per unit for Bedford Lamp = $120 - $70 = $50 
The contribution margin per unit for Lowell Lamp = $80 - $60 = $20

To calculate the contribution margin per machine hour, we need to divide the contribution margin by the number of machine hours required to produce one unit of each product.

Machine hours required per unit of Bedford Lamp = 1 
Machine hours required per unit of Lowell Lamp = 0.5

Contribution margin per machine hour for Bedford Lamp = $50/1 = $50 
Contribution margin per machine hour for Lowell Lamp = $20/0.5 = $40

Now, we can allocate machine hours to each product based on their contribution margin per machine hour.

If we sell 8,000 units of Bedford Lamp and 4,000 units of Lowell Lamp, total machine hours required = (8,000 x 1) + (4,000 x 0.5) = 10,000 
This leaves us with 16,000 machine hours unused.

If we sell 4,000 units of Bedford Lamp and zero Lowell Lamp, total machine hours required = (4,000 x 1) + (0 x 0.5) = 4,000 
This leaves us with 22,000 machine hours unused.

If we sell 8,000 units of Bedford Lamp and 2,500 units of Lowell Lamp, total machine hours required = (8,000 x 1) + (2,500 x 0.5) = 11,250 
This leaves us with 14,750 machine hours unused.

Therefore, the best option is to sell 8,000 units of Bedford Lamp and 2,500 units of Lowell Lamp as it generates the highest contribution margin per machine hour and leaves the least amount of unused machine hours.

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