You are provided with the following information relating to the sales, estimated

Question

You are provided with the following information relating to the sales, estimated demands and production costs for each bench, table and chair. Bench Table Chair £60 1,800 £10 £3 £71 1,500 £12 £4 £45 3,000 £2 £7 £6 £1 Estimated selling price Maximum demand Raw materials In units - timber - metal fittings - fabric Packing Each bench, table or chair involves in two separate stages of processin;g £2 £2 The timber is machined, finished and assembled. Metal fittings are fixed 2.The products are painted and varnished to packaging in polythene and cardboard Labour costs are based on the following estimated time (in minutes) required for each processing stage Benches Tables Chairs Stage 1 180 150 60 Stage 2 20 60 40 The following rates for labour are applied Stage l Stage 2 £ per hour There are a maximum of 10,500 hours of labour available for stage 1. Required: (a) Advise the management the maximum output for each product and the total contribution of the proposed optimal production plan (b) Explain clearly the basis method used in (a) (c) Identify two factors that should be considered before a final decision is made. 4

Explanation / Answer

BENCH TABLE CHAIR Selling price per unit 60 71 45 Maximum demand in units 1800 1500 3000 Labor time in minutes: Stage 1 180 150 60 Stage 2 20 60 40 Variable cost per unit: Raw materials 13 16 15 Packing 2 2 1 Stage 1 labor 12 10 4 Stage 2 labor 1 3 2 Total variable cost per unit 28 31 22 Contribution margin per unit 32 40 23 Contribution margin per hour of Stage 1 labor: Stage 1 labor in hours 3 2.5 1 CM per hourof Stage 1 of labor 10.67 16.00 23.00 ANSWERS: a) As the CM margin per hour of Stage 1 labor is more for Chair, it should be produced to the maximum extent, then Tables and lastly Benches. The allocation of the 10500 hours and the total contribution would be: Units Stage 1 Labor hours Total labor hours CM per hour Total CM Chairs 3000 3 9000 23.00 207000 Tables 600 2.5 1500 16.00 24000 Total 3600 10500 231000 The maximum output for products is: Chairs 3000 Tables 600 Benches 0 Total contribution margin for the plan = 231000 b) The basis used is the CM per unit of Stage 2 labor which is in short supply, so that total CM is maximized. c) The two factors are: 1) The firm may lose markets for benches totally and partially for Tables. 2) Whether the three products have linked demands as tables and chairs may go together to a certain extent. If so it should be considered.

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