Deng Corporation manufactures two styles of lamps - Bedford Lamp and Lowell Lamp.The following per unit data are available: $$\begin{array} { | l | r | r | }
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sales price } & \$ 30 & \$ 35 \
\hline \text { Variable costs } & \$ 18 & \$ 23 \
\hline \text { Machine hours required for one lamp } & 2 & 4 \
\hline
\end{array}$$ Total fixed costs are $50,000.Machine hour capacity is 30,000 hours per year.Assuming that the company can sell as many products as it can make,which product mix would deliver the highest operating income?

Question

Deng Corporation manufactures two styles of lamps - Bedford Lamp and Lowell Lamp.The following per unit data are available: $$\begin{array} { | l | r | r | } 
\hline & \text { Bedford Lamp } & \text { Lowell Lamp } \
\hline \text { Sales price } & \$ 30 & \$ 35 \
\hline \text { Variable costs } & \$ 18 & \$ 23 \
\hline \text { Machine hours required for one lamp } & 2 & 4 \
\hline
\end{array}$$ Total fixed costs are $50,000.Machine hour capacity is 30,000 hours per year.Assuming that the company can sell as many products as it can make,which product mix would deliver the highest operating income?

Quizplus · Accepted Answer

The contribution margin per unit for Bedford Lamp is $12 (\$30 - \$18) and for Lowell Lamp is $12 (\$35 - \$23). However, Bedford Lamp requires half the machine hours per unit compared to Lowell Lamp (2 hours vs. 4 hours). Therefore, producing only Bedford Lamps maximizes the number of units produced within the machine hour capacity, leading to the highest operating income. With 30,000 machine hours and 2 hours required per Bedford Lamp, the company can produce 15,000 Bedford Lamps.

Deng Corporation Manufactures Two Styles of Lamps - Bedford Lamp