Question

Tread Mile produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Tread Mile could use all its available machine hours to produce either model. The two models are processed through the same production departments. Data for both models are as follows: (Click the icon to view the data.) i Data Table Read the requirements. Requirement 1. What is the constraint? Tread Mile's constraint is C V . Per Unit Deluxe Regular 1,040 $ Requirements 570 Sales Price Costs: Direct Materials 300 Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead 1. What is the constraint? 2. Which model should Tread Mile produce? (Hint: Use the allocation of fixed manufacturing overhead to determine the proportion of machine hours used by each product.) 3. If Tread Mile should produce both models, compute the mix that will maximize operating income. 276 120 115 Variable Operating Expenses Total Costs 889 479 Print Done 151 $ Operating Income 'allocated on the basis of machine hours SI A . .. ....

Answer 1

1. A constrained resource is something that you have a limited amount of. In a manufacturing business it may be machine time, labor hours or raw materials.

In the given example, machine hours is constraint.

2.

As fixed manufacturing overheads for Deluxe are $ 120 whereas for regular it is $ 40
Fixed manufacturing overheads are allocated on the basis of machine hours
This means that for same machine hours we can make 3 reguar trade miils or 1 deluxe trade mill.
				Deluxe	Regular
				$	$
Sale price				1040	570
Variable cost:
Direct material				300	90
Direct labor				78	190
Variable manufacturing overhead				276	92
Variable operating expenses				115	67
Contribution margin				271	131
Machine hours				3	1
Contribution per machine hour				90.33	131
As contribution margin of regular is more, Regular trade mill should be produced

3. It makes no sense for Trade Mille to produce the deluxe model if it has an unlimited demand for the regular model because regular model uses each hour of the machine time more profitably.