Question

Gildan Limited is a clothing manufacturer specializing in sustainable lady’s fashion. The company has been in operation for ten years and during that time has built up a loyal and expanding customer base. Gildan Limited has three signature lines, Tops (shirts and Blouses), Bottoms (skirts and pants) and a Suits, all produced from organically grown and dyed linen fabric. Successful marketing and sales of these garments has resulted in the company exceeding full capacity at its current manufacturing base in Newton. Consequently, the directors are considering expanding production capacity over the next few years and are examining a number of possibilities. However, for the current year the company has a total of 15,000 machine hours and 20,000 direct labour hours available for production at its Newton manufacturing base. Production and sales details relating to the signature garments are shown below:

	Tops	Bottoms	Suits
Direct material (linen) @$6 per meter	1.5 m	1.25 m	2.5 m
Direct labor@ $12per hour	0.25 hrs	0.25 hrs	0.5 hours
Variable overhead @ 150% of direct labor cost
Machine hours required	0.3 hrs	0.2hrs	0.25 hrs
Sales demand units (annual)	30,000	18,000	15,000
Selling price per unit	$ 54.00	$80.00	$105.00

Additional Information

Budgeted fixed manufacturing overheads per month $ 95,200

Budgeted selling and administrative cost per month $42,500

Required.

1. Based on the information provided, state whether Gildan Ltd has sufficient production capacity to satisfy sales demand for the coming year. (provide computations)

2. Compute the optimal production plan for Gildan Ltd for the current year, clearly showing total profit expected.   (10 marks)

Answer 1

CALCULATIONS:
	Tops	Bottoms	Suits
Direct material (linen) in meters per unit	1.5	1.25	2.5
Direct material cost per meter	$             6.00	$             6.00	$           6.00
Direct labor hour per unit	0.25	0.25	0.50
Direct labor cost per hour	$           12.00	$           12.00	$        12.00
Variable overead - 150% of direct labor cost
Machine hours required per unit	0.30	0.20	0.25
Annual sales demand in units	30000	18000	15000
Selling price per unit	$           54.00	$           80.00	$      105.00
Variable cost per unit:
Direct material cost	$             9.00	$             7.50	$        15.00
Direct labor cost	$             3.00	$             3.00	$           6.00
Variable overead	$             4.50	$             4.50	$           9.00
Variable cost per unit	$           16.50	$           15.00	$        30.00
Contribution margin per unit	$           37.50	$           65.00	$        75.00
CM per direct labor hour	$         150.00	$         260.00	$      150.00
CM per machine hour	$         125.00	$         325.00	$      300.00
ANSWERS:	Tops	Bottoms	Suits	Total	Total Available
Total direct labor hours required to satisfy demand	7500	4500	7500	19500	20000
Total machine hours required to satisfy demand	9000	3600	3750	16350	15000
Gildan Ltd, does not have sufficient machine hours to satisfy demand.
As machine hours is the scarce resource, the allocation of available machine hours should be done on
the basis of CM per machine hour.
Rank in the order of CM per machine hour	3	1	2
Allocation of machine hours:	Hours	Units to be produced	CM per unit	Total CM
Bottoms	3600	18000	$        65.00	$ 11,70,000
Suits	3750	15000	$        75.00	$ 11,25,000
Balance	7650	25500	$        37.50	$    9,56,250
Total machine hours allocated	15000			$ 32,51,250
Less: Fixed costs:
Manufacturing			$      95,200
Selling and administration			$      42,500
Total fixed costs				$    1,37,700
Expected profit				$ 31,13,550