Question

Short term decision making  

Shot plc manufactures three types of furniture products - chairs, stools and tables. The budgeted unit cost and resource requirements of each of these items are detailed below:

	Chair		Stools		Table
	($)		($)		($)
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
	16.50		43.75		33.00
Budgeted volumes	4,000		2,000		1,500

per annum

These volumes are believed to equal the market demand for these products. The fixed overhead costs are attributed to the three products on the basis of direct labour hours. The labour rate is $4.00 per hour. The cost of timber is $2.00 per square metre. The products are made from a specialist timber. A memo from the purchasing manager advises you that because of a problem with the supplier it is to be assumed that this specialist timber is limited in supply to 20,000 square metres per annum.

The sales director has already accepted an order for 500 chairs, 100 stools and 150 tables, which if not supplied would incur a financial penalty of $2,000. These quantities are included in the market demand estimates above. The selling prices per unit of the three products are:

-

Chair $20.00

Stool $50.00 Table $40.00

Required:

1. Determine the optimum production plan and state the net profit that this should yield per annum.                                                                                                           
   
2. Discuss one qualitative factor that you should consider (especially in the long term) in your decision in part (a).                                                                                      
   

Answer 1

1. Computation of Contribution Margin per Unit per Square Meter of Timer

The Limited resource of Timber will be first allocated to special order and then to Chair and Table and the 3rd allocation will be made to Stool.

Resource Allocation:

to special order = 500 * 2.5 + 100 * 7.5 + 150 * 5 = 2750 Meters

Chair = 4000 * 2.5 = 10000 Timber Square Meter

Table = 7250 / 5 = 1450 Units

Optimal Production Plan = Chair = 4500; Stool = 100 Units; Table = 1600 Units

Net Profit from this Production Plan

b. The Company will have impact on the reduced production of stool and there will be reduction in market share in case of stools.