Question

Treadlight produces two types of exercise treadmills: regularand deluxe. The exercise craze is such that TreadLight could useall its available machine hours to produce either model. The twomodels are processed through the same production departments. Datafor both models is as follows:

Sale Price: Deluxe per unit ($1,010), Regular per unit($560)

Costs:

Direct materials: deluxe per unit ($320), Regular per unit($90)

direct labor: deluxe per unit ($82), regular per unit ($184)

variable manufacturing overhead: deluxe per unit ($240), regularper unit ($80)

fixed manufacturing overhead *: deluxe per unit ($126), regularper unit ($42)

variable operating expenses: deluxe per unit ($117) , regularper unit ($69)

total cost: deluxe per unit ($885), regular per unit ($465)

operating income: deluxe per unit ($125), regular per unit($95)

*allocated on the basis of machine hours

a. Which model should Treadlight produce? (Hint: TreadLight canproduce either 1 deluxe treadmill or 3 regular treadmills permachine hour.)

Prepare the product mix analysis

Treadlight

Product Mix Analysis

Sales price per unit: deluxe:_______,regular:________

variable costs per unit:deluxe:______,regular:_______

contribution margin per unit: deluxe:______,regular:______

units that can be produced each machine hour: deluxe:______,regular:_______

contribution margin per machine hour: deluxe:______,regular:_______

b. Should Treadlight produce both models? If so, compute the mixthat will maximize operating income.

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Members of the board of directors of Safety Step have receivedthe following operating income data for the year ended May 31,2012:

Safety Step

income statement

For the year ended May 31, 2012

Sales Revenue: Product line industrial systems ($350000),product line household systems ($360,000), total ($710,000)

cost of goods sold:

variable: product line industrial systems (34000), product linehousehold systems (47,000), total (81,000)

fixed: product line industrial systems (230,000), product linehousehold systems (69,000), total (299,000)

total cost of goods sold: product line industrial systems($264000), product line household systems(116,000), total(380000)

gross profit: product line industrial systems ($86,000), productline household systems (244,000), total (330,000)

marketing and administrative expenses:

variable: product line industrial systems (69,000), product linehousehold systems (76,000), total (145000)

fixed: product line industrial systems (41000), product linehousehold systems (24,000), total (65,000)

total marketing administrative exp.: product line industrialsystems (110,000), product line household systems (100,000),Total($210,000)

operating income (loss): product line industrial systems(-$24,000), product line household systems ($144,000), total$120,000

Members of the board are surprised that the industrial systemsproduct line is losing money. They commission a study to determinewhether the company should drop the line. Company accountantsestimate that dropping industrial systems will decrease fixed costof goods sold by $81,000 and decrease fixed marketing andadministrative expenses by $14,000.

1. prepare an incremental analysis to show whether Safety Stepshould drop the industrial systems product line. fill in theblanks.

Safety Step

incremental analysis of dropping a product line

expected decrease in revenues--

dropping industrial systems sales ________

expected decrease in expenses:

variable expenses:

cost of goods sold ________

marketing and administrative expenses _________

fixed expenses:

cost of goods sold _________

marketing and administrative expenses __________

expected decrease in total expenses __________

__________(expected decrease or expected increase) in operatingincome _____________

2. Prepare contribution margin income statements to show SafetyStep's total operating income under the two alternatives: (a) withthe industrial systems line and (b) without the line . Compare thedifference between the two alternatives' income numbers to youranswer to requirement 1.

3. What have you learned from the comparison in requirement2?