10.

23
Only Model 14 should be produced. The key to this problem is the relationship of
manufacturing overhead to each product. Note that it takes twice as long to produce Model 9;
machine-hours for Model 9 are twice that for Model 14. Management should choose the
product mix that maximizes operating income for a given production capacity (the scarce
resource in this situation). In this case, Model 14 will yield a $14.25 contribution to fixed costs
per machine hour, and Model 9 will yield only $13.50.

Decision-Making and Relevant Information

Body-Builders, Inc.

Original Data
Model 9 Model 14
Selling Price $150.00 $105.00
Costs
Direct materials 42.00 19.50
Direct manufacturing labor 22.50 37.50
Variable manufacturing overhead 37.50 18.75
Fixed manufacturing overhead 15.00 7.50
Marketing costs (all variable) 21.00 15.00
Total costs 138.00 98.25
Operating Income $12.00 $6.75

Product Mix Analysis

Model 9 Model 14
Selling price $150 $105
Variable cost per unit 123.00 90.75
Contribution margin per unit 27.00 14.25
Relative use of machine-hours per unit of 2 1
product
Contribution margin per machine-hour $13.5 $14.25
10.25
1) Yes, Maria Lopez is correct with his statement that by closing a Bendigo store brings net
benefit.

2) Yes, Maria Lopez is correct with his statement that by opening a Bendigo store brings net
benefit