E25-15 Making product mix decisions

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:

Per Unit

Deluxe Regular

Sales Price$1040 $570

Costs:

Direct materials300 90

Direct labor 78190

Variable Manufacturing Overhead 276 92

Fixed Manufacturing Overhead*120 40

Variable Operating Expenses 11567

Total Costs 889 479

Operating Income $151 $91

*allocated on the basis of machine hours

Requirements

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.