Question

Sandy Company manufactures three models of office chairs: economy, basic and deluxe.

Product information is provided below.
All per unit amounts are based on estimated of 5,000 units of each item produced and sold.   

	Economy	Basic	Deluxe
Sales price (per unit)	$150	$210	$320
Variable selling costs (per unit)	$30	$30	$30
Variable manufacturing costs (per unit)	$40	$80	$200
Fixed manufacturing costs** (per unit)	$20	$45	$70
Net income per unit (computed from amounts above)	$60	$55	$20

Fixed manufacturing costs of $120,000 were allocated based on direct labor hours. The costs are unavoidable.

If Sandy has excess capacity, and there is unsatisfied demand for all three products, which model should they produce?

	a.	economy
	b.	basic
	c.	deluxe

Answer 1

• All working forms part of the answer
• Fixed cost are unavoidable, hence only variable cost is to be considered for this decision making.
• The product with highest contribution margin per unit will be produced.
• Working

Working		Economy	Basic	Deluxe
A	Sales price (per unit)	$            150.00	$                 210.00	$               320.00
B	Variable selling costs (per unit)	$              30.00	$                   30.00	$                  30.00
C	Variable manufacturing costs (per unit)	$              40.00	$                   80.00	$               200.00
D=A-B-C	Contribution margin per unit	$              80.00	$                 100.00	$                  90.00

• Answer: Since Basic Model has the maximum contribution margin per unit among rest, the answer is Option – B ‘’Basic’’