Taylor Furniture produces and sells three kinds of speciality mattresses; Nealy, Tersa and Pelta. Production is a machine-intensive process. Taylor’s variable costs are direct material costs, variable machining costs, and sales commissions. Marion Taylor, the owner, is planning production for the coming year and collects the following data.
NEALY TERSA PELTA
Estimated Demand 1,800 units 4,500 units 39,000 units
Selling Price per unit $3,000 $2,100 $800
Direct material cost per unit $750 $500 $100
Variable machining cost per unit $600 $500 $200
Sales commission on each unit sold 5% 5% 10%
Fixed manufacturing Costs per unit $50 $70 $12
Fixed Marketing Costs per unit $15 $40 $18
Total fixed administration costs amount to $3,750,000.
Annual capacity is 50,000 machine hours which is limited by the availability of machines.
Variable machining costs are $200 per hour.
The production manager has indicated to Marion Taylor that it is not possible to meet the total demand for the three types of mattresses with the available machine hours. Marion has asked you to decide on the product mix for the next year to maximise the profits from the available machine hours.
A. Out of the above given data which Marion has collected, list the information which is NOT relevant to deciding the product mix to maximise the contribution to company profits (15 marks).
B. Using the relevant information given above, calculate the optimum product mix that would maximise the contribution to company profits (50 marks). Estimate the contribution to profits that would result under the product mix that you calculated (15 marks).
C.Suppose the company can lease additional machining capacity on an as-needed basis. What is the maximum amount that Marion would be willing to pay for each hour of additional machining capacity in the coming year (20 marks)?