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

Answer 1

		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.