Isabelle's Furniture manufactures a small table and a large table.The small table sells for $800,has variable costs of $570 per table,and takes 10 direct labor hours to manufacture.The large table sells for $1,700,has variable costs of $970,and takes eight direct labor hours to manufacture.The company has a maximum of 5,000 direct labor hours per month when operating at full capacity.If there are no constraints on sales of either product,and the company could choose any proportions of product mix that they wanted,what is the optimum product mix to maximize operating income of the company?

Question

Quizplus · Accepted Answer

To maximize operating income, the company should focus on the product with the highest contribution margin per labor hour. The contribution margin per unit for the small table is $800 - $570 = $230, and for the large table, it's $1,700 - $970 = $730. The contribution margin per labor hour for the small table is $230 / 10 = $23, and for the large table, it's $730 / 8 = $91.25. Since the large table has a higher contribution margin per labor hour, the company should produce only large tables to maximize operating income. With 5,000 direct labor hours available and each large table requiring 8 hours, the company can produce 5,000 / 8 = 625 large tables.

Isabelle's Furniture Manufactures a Small Table and a Large Table