Question

GetFit produces two types of exercise​ treadmills: Regular and Deluxe. The exercise craze and related demand is such that GetFit could use all of its available machine hours producing either model. The two models are processed through the same production department.

	A	B	C
1		Per Unit
2		Deluxe	Regular
3	Sale price	$990	$530
4	Less expenses:
5	Direct materials	300	160
6	Direct labor	94	188
7	Variable manufacturing overhead	270	90
8	Fixed manufacturing overhead*	132	44
9	Variable operating expenses	113	57
10	Total expenses	$909	$539
11	Operating income	$81	$(9)

​*Allocated on the basis of machine hours

What product mix will maximize operating​ income?

​(Hint​:

Use the allocation of fixed manufacturing overhead to determine the proportion of machine hours used by each​ product.)

Prepare the product mix analysis.

  

GetFit
Product Mix Analysis
	Deluxe	Regular

Answer 1

Step 1: Calculation of units produced with equivalent machine hours

As per the hint provided in the question, allocation of fixed manufacturing overhead is used to determine the proportion of machine hours used by each​ product.

Particulars	Deluxe	Regular
Fixed manufacturing overhead*	132	44
Proportion of machine hours used by each​ product	1	3

From the above calculation we understand that 3 units of Regual can be produced in the time required to produce 1 unit of delux.

Step 2: Calculation of contribution margin for equivalent machine hours

Particulars	Deluxe	Regular
Sale price	990	530
Less expenses:
Direct materials	300	160
Direct labour	94	188
Variable manufacturing overhead	270	90
Variable operating expenses	113	57
Contribution margin per unit	1,767	1,025
Proportion of machine hours used by each​ product	1	3
Contribution margin for equivalent machine hours	1,767	3,075

As 3 units of Regular can be produced in the same amount of time it requires to produce 1 unit of deluxe, we have multiplied the contribution margin per unit of Regular by 3.

Conclustion:

Since the demand is unlimited, GetFit should produce  only Regular to maximise operating income.