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In: Accounting

Elegant Furniture Company(Elegant) manufactures and sells modern furniture. The company’s products only include two models of...

Elegant Furniture Company(Elegant) manufactures and sells modern furniture. The company’s products only include two models of dining table: Deluxe and Simplicity. The selling prices and costs data for each unit of the products are as follows: Deluxe Simplicity $ $ Selling price 10,000 8,000 Direct materials (variable) 2,600 2,300 Direct labour (variable) 500 400 Manufacturing overhead (semi-variable, 90% fixed) 5,000 4,000 Selling expenses (variable) 400 400 Administrative expenses (fixed) 1,000 800 According to Elegant’s 2020 business plan, the company wants to achieve the target of manufacturing and selling at least 5,000 units of Deluxe and 2,000 units of Simplicity every month. Currently the company’s manufacturing process is limited by the machine capacity in the machining department. The total machine time available in the machining department is 78,000 minutes per month. Apart from this, there is no other relevant constraint on the manufacturing process. Each unit of Deluxe requires 12 minutes of machine time and each unit of Simplicity requires 6 minutes of machine time. Required:

(c) Assuming that there is unlimited demand for Deluxe and Simplicity at current selling prices, what product mix, i.e. how many units of Deluxe and Simplicity should Elegant produce and sell that will maximize its operating income while meeting its 2020 business plan? Show your calculations clearly.

(d) Assuming that the demand of Simplicity is limited to 2,500 units, what product mix should the company adopt to maximize operating income while meeting its 2020 business plan? Show your calculations clearly. (e) In view of the constraint on machining time, the production manager suggests to outsource the manufacture of Simplicity to a vendor who has offered a very competitive price. The management accountant has analysed and confirmed that there will be cost advantages from the outsourcing proposal. Suggest TWO strategic and qualitative issues that Elegant’s management may consider before making the decision. Question 2 Advanced Electronics Ltd (Advanced) manufactures and sells high-end electronic

Solutions

Expert Solution

c. 13,000 units of Simplicity and 0 units of Deluxe should be produced each month for maximum profitability.

Deluxe Simplicity
Selling Price per Unit $ 10,000 $ 8,000
Variable cost per Unit
Direct materials 2,600 2,300
Direct labor 500 400
Variable MOH 500 400
Selling Expenses 400 400
Contribution Margin per unit $ 6,000 $ 4,500
Machine Time per unit 12 mins. 6 mins
Contribution Margin per Minute $ 500 $ 750

As Simplicity has a higher contribution margin per unit of constrained resource, its production should be prioritized. As the demand is unlimited, all 78,000 mins of machine time should be devoted for Simplicity for maximum profitability.

Therefore, 78,000 / 6 = 13,000 of units of Simplicity should be produced.

d. 5,250 units of Deluxe, and 2,500 units of Simplicity.

If the demand for Simplicity is capped at 2,500 units, it would use up 2,500 x 6 = 15,000 mins of machine time.

Machine time remaining for Deluxe = 78,000 - 15,000 = 63,000 mins.

Therefore, 63,000 / 12 = 5,250 units of Deluxe can be produced with the remaining capacity.

e. Issues to be considered in outsourcing:

  • What to do with idle facilities? Is there an alternate use for maximizing profitability? How to deploy the idle workforce? Do you let your skilled workforce go?
  • The track record of the outside vendor is a crucial factor. Would his supplies be of the same quality ? What if the vendor does not supply on time? How does the management fill its orders? It could lead to loss customers, reputation and market share.

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