McDermott Corporation manufactures both automatic and manual residential water treatment units. Because of limited demand, for several years production has been at 90% of estimated capacity, which is thought to be limited by the number of machine hours available. At current operation levels, a profit analysis for each product line shows the following:

Management wants to utilize the company’s current excess capacity by increasing production.

Required

a. What general decision guideline applies in this situation?

b. Assuming that sufficient units of either product can be sold at current prices to use existing capacity fully and that total fixed cost will not be affected, prepare an analysis showing which product line should be emphasized if net income for the firm is the decision basis.

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Sales price Production costs: Direct materials.. Direct labor.. Variable manufacturing overhead. Fixed manufacturing overhead" Variable operating expenses. Fixed operating expenses Total cost Operating income. *Assigned on the basis of machine hours at normal capacity. Per-Unit Data Automatic $800 $144 128 64 144 $480 80 144 Manual e $416 $248 16 96 $704 $360 $ 96 $ 56