Home Appliances Company manufactures small appliances, such as electric can openers, toasters, food mixers and irons. The peak manufacturing season is at hand and the president is trying to decide whether to produce more of the company’s standard line of can openers or its premium line that includes a built-in knife sharpener, a better finish and a higher-quality motor. The unit data follow:

The sales outlook is very encouraging. The plant could operate at full capacity by producing either product or both products. Both the standard and the premium products are processed through the same departments. Selling and administrative costs will not be affected by this decision so they may be ignored.

Many of the parts are produced on automatic machinery. The factory overhead is allocated to products by developing separate rates per machine-hour for variable and fixed overhead.

For example, the total fixed overhead is divided by the total machine-hours to get a rate per hour. Thus, the amount of overhead allocated to products is dependent on the number of machine-hours used by the product. It takes 1 hour of machine time to produce one unit of the standard product.

Direct labour may not be proportionate with overhead because many workers operate two or more machines simultaneously.

Which product should be produced? If more than one should be produced, indicate the proportions of each. Show computations. Explain your answers briefly.

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Selling price Direct material Direct labour Variable factory overhead Fixed factory overhead Total cost of goods sold Gross profit per unit Product Standard Premium €29 €39 € 8 €13 1 6 9 2 4 6 €20 € 9 €29 €10