Task 2: Short Term Decision Making Gammy Furniture produces and sells specialty
ID: 2539668 • Letter: T
Question
Task 2: Short Term Decision Making Gammy Furniture produces and sells specialty mattresses. Production is a machine-intensive process. The company's variable costs are direct material costs; variable machining costs; and sales commission. Martha, the owner, is planning production for the coming year and collects the following data:- Direct material cost per unit (RM) Variable machining cost per unit (RM) Estimated demand (units) 1,800 4,500 39,000 Selling Price per unit (RM) Product Nealy Tersa Pelta 3,000 2,100 800 750 500 100 600 500 200 Salespeople are paid a 5% commission on each Nealy or Tersa sold, and a 10% commission on each Pelta sold. All other marketing and administrative costs are fixed and, along with the fixed manufacturing costs, total RM8,750,000. 1. 2. Annual capacity is 50,000 machine hours, which is limited by the availability of machines. 3. Required: Variable machining costs are RM200 per hour. Gammy Furniture holds negligible inventories to minimise business risk. a. Calculate the machine hours required to satisfy the estimated demand for each type of mattress. (4.5) (4.5) c. Advise (with calculations) Martha about the most profitable production levels of the three b. What is the contribution margin per unit earned from each type of mattress? products d. What qualitative factor would Martha have to consider in this situation? Total: 20)Explanation / Answer
Product
Nealy
Tersa
Pelta
Total
Variable Machining Cost per unit
[A]
600
500
200
Variable Machining costs per hour
[B]
200
200
200
No of machine hours per unit
[A/B]
3
2.5
1
Estimated Demand
1800
4500
39000
Machine Hours
[No of machine hours *demand]
5400
11250
39000
55650
b)
Product
Nealy
Tersa
Pelta
Selling Price per unit
3000
2100
800
Less:Variable Costs
Direct Material Cost
750
500
100
Variable Machining Cost
600
500
200
Sales Commision
150
105
80
Contribution
1500
995
420
c)
Calculation of machine hours for Tersa =50,000- 39000 - 5400 = 5600
d) Martha along with maximizing the profits also has to consider the quality of the products and should not comprise on quality. Also, other qualitative factors are:
1. Effect of decision on employee morale, motivation
2. Decision on long term profitability
3. Decision of the company on company's public image
Product
Nealy
Tersa
Pelta
Total
Variable Machining Cost per unit
[A]
600
500
200
Variable Machining costs per hour
[B]
200
200
200
No of machine hours per unit
[A/B]
3
2.5
1
Estimated Demand
1800
4500
39000
Machine Hours
[No of machine hours *demand]
5400
11250
39000
55650
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