produces two basic types of weight-lifting equipment, Model 9 and Model 14. Pertinent data are as follows:
A
B
C
1
Per Unit
2
Model 9
Model 14
3
Selling price
$110.00
$100.00
4
Costs
5
Direct material
22.00
10.00
6
Variable direct manufacturing labor
13.00
27.00
7
Variable manufacturing overhead
20.00
10.00
8
Fixed manufacturing overhead*
5.00
2.50
9
Marketing (all variable)
14.00
11.00
10
Total costs
74.00
60.50
11
Operating income
$36.00
$39.50
12
*Allocated on the basis of machine-hours
The weight-lifting craze suggests that
Body World
can sell enough of either Model 9 or Model 14 to keep the plant operating at full capacity. Both products are processed through the same production departments.
Which product should the company produce? Briefly explain your answer.
| Analysis - Weight Lifting Equipment | |||
| Model9 | Model 14 | ||
| Selling Price | $110.00 | $100.00 | |
| - | Variable Cost | $69.00 | $58.00 |
| = | Contribution Margin per Unit | $41.00 | $42.00 |
| / | Relative Use of Machine Hours per Unit | $2.00 | $1.00 |
| = | Contribution Margin per Mchine Hour | $20.50 | $42.00 |
|
* Variable Cost Model 19= (22+13+20+14)=$69 Model 14= (10+27+10+11)=$58 |
Model 14 should be produced since this model results in th higher contribution margin per machine hour as compare to model 9
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