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- 10 Marks
Question
Blasius Ltd is a leading manufacturer of furniture in Ghana. The company manufactures these three garden furniture products – chair, bench, and table. The budgeted unit cost and resource requirements of each of these items are detailed below:
| Product | Chair (GH¢) | Bench (GH¢) | Table (GH¢) |
|---|---|---|---|
| Timber cost | 5.00 | 15.00 | 10.00 |
| Direct labour cost | 4.00 | 10.00 | 8.00 |
| Variable overhead cost | 3.00 | 7.50 | 6.00 |
| Fixed overhead cost | 4.50 | 11.25 | 9.00 |
| Total Cost | 16.50 | 43.75 | 33.00 |
Budgeted volumes per annum:
| Product | Quantity |
|---|---|
| Chair | 3,500 |
| Bench | 1,900 |
| Table | 1,350 |
These volumes are believed to equal the market demand for these products. Fixed overhead costs are attributed to the three products on the basis of direct labour hours. The cost of the timber is GH¢2.00 per square metre.
The products are made from a specialized timber. A memo from the purchasing manager advises you that because of a problem with the supplier, this specialized timber is limited in supply to 20,000 square metres per annum.
The sales director has already accepted an order for 500 chairs, 100 benches, and 150 tables which, if not supplied, would incur a financial penalty of GH¢2,000. These quantities are NOT included in the market demand estimates above.
The selling prices of the three products are:
| Product | Selling Price (GH¢) |
|---|---|
| Chair | 20.00 |
| Bench | 50.00 |
| Table | 40.00 |
Required:
a) Determine the optimum production plan and state the total contribution that this would yield. (10 marks)
Answer
Contribution per Unit
| Product | Chair (GH¢) | Bench (GH¢) | Table (GH¢) |
|---|---|---|---|
| Selling Price | 20.00 | 50.00 | 40.00 |
| Variable Cost | (12.00) | (32.50) | (24.00) |
| Contribution per Unit | 8.00 | 17.50 | 16.00 |
Contribution per Square Metre of Timber
| Product | Chair | Bench | Table |
|---|---|---|---|
| Timber Usage (sq.m) | 2.5 | 7.5 | 5.0 |
| Contribution per Unit | 8.00 | 17.50 | 16.00 |
| Contribution per sq.m | 3.20 | 2.33 | 3.20 |
Ranking:
1st = Chair, Table
2nd = Bench
Optimum Production Plan
| Product | Quantity | Timber Usage (sq.m) | Contribution (GH¢) |
|---|---|---|---|
| Minimum Order Fulfillment: | |||
| Chair | 500 | 1,250 | 4,000 |
| Bench | 100 | 750 | 1,750 |
| Table | 150 | 750 | 2,400 |
| Total | 2,750 | 8,150 | |
| Remaining Timber Allocation: | 17,250 | ||
| Chair | 3,500 | 8,750 | 28,000 |
| Table | 1,350 | 6,750 | 21,600 |
| Bench | 233 | 1,747.5 | 4,077.5 |
| Total Contribution | 19,997.5 | 61,827.5 |
Since the optimum plan includes production of sufficient quantities of each item to meet the order comprising the minimum demand, and production of the most profitable items already meets the maximum demand, there is no need to consider the financial penalty.
(8 marks evenly spread using ticks)
- Topic: Decision-making techniques, Relevant Cost and Revenue
- Series: MAY 2020
- Uploader: Dotse