Total control Industries manufactures exercise equipment. Management is trying to decide between two particular exercise equipment as to the quantities they should produce and sell to maximise their profit. The two equipment are Treadmill A3 and Treadmill B500. The following data relates to the products.

Treadmill A3

Treadmill B500

Selling price per unit

$1200

$1600

Direct material

$500

$650

Direct labour

$300

$500

Variable overhead

$40

$50

Variable selling costs

$25

$25

Total variable cost/unit

$865

$1,225

Although most of the manufacturing process is done on machines, there is a requirement for highly skilled staff to finish the manufacturing process. The skilled labour is in short supply, thus considered to be a scarce resource.It takes 3 labour hours to produce one Treadmill A3 and 5 labour hours to produce one Treadmill B500.

Required:

1. Calculate the contribution margin per unit for Treadmill A3 and treadmill B500. (2 mark)

2. Which product is more profitable, Treadmill A3 or Treadmill B500, given the limited resource of labour. Show all workings. (3 marks)

3. Total control Industries only has a maximum of 2200 labour hours per day and the daily demand for Treadmill A3 is 600 units. There is unlimited demand for Treadmill B500.How many units of each type of Treadmill should be produced to maximize the total contribution margin? (4 marks)

4. What is the total contribution margin at the optimal level? (2 marks)