The Home Appliance Company manufactures small appliances, such as electric can openers, toasters, food mixers, and irons. The peak 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 of its premium line that includes a builtin 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 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 determine a rate per hour. Thus the amount of overhead allocated to product depends on the number of machine-hours allocated to the product. It takes one 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 answer briefly

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Product Standard Premium Selling price $28 $38 Direct material 8 13 Direct labour 2 Variable factory overhead Fixed factory overhead 4 Total cost of goods sold 20 29 $ 9 Gross profit per unit $ 8