Santana Rey has found that Business Solutions’s line of computer desks and chairs has become very popular, and she is

Question

Santana Rey has found that Business Solutions’s line of computer desks and chairs has become very popular, and she is finding it hard to keep up with demand. She knows that she cannot fill all of her orders for both items, so she decides she must determine the optimal sales mix given the resources she has available. Information about the desks and chairs follows. Desks Chairs Selling price per unit $ 1,125 $ 375 Variable costs per unit 500 200 Contribution margin per unit $ 625 $ 175 Direct labor hours per unit 5 hours 4 hours Expected demand for next quarter 175 desks 50 chairs Santana has determined that she only has 1,015 direct labor hours available for the next quarter and wants to optimize her contribution margin given the limited number of direct labor hours available. Required: Determine the optimal sales mix and the contribution margin the business will earn at that sales mix. (Round per unit amounts to 2 decimal places.) desk chairs contribution per DL desk chairs total

Help In Homework · Accepted Answer

Solution Step-1 Desks Chairs Selling price per unit 1,125 375 Variable costs per unit 500 200 Contribution margin per unit 625 175 Direct labor hours per unit 5 hours 4 hours Contribution Per Labour hour 125 43.75 Rank Based on Contribution per Labour Hour 1 2 From the above calculation it is clear that desks have more contribution per limiting factor here labour hour So desks ranked 1 and Chairs ranked 2. So in order to maximise profit we have to produce desks to the maximum demand and Chairs for the balance labour hours. Step-2 Total Labour hours Available 1015 hours Number of Desks to be produced 175 desks Direct labor hours per unit 5 hours Total Labour hours for Desks 875 hours Balance hours Available 140 hours (1015-875) Direct labor hours per unit 4 hours Number of Desks to be produced 35 Chairs (140/4) Step-3 Desks Chairs hours dedicated to the product 875 140 1015 units produced 175 35 contribution margin per unit 625 175 total contribution margin

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Santana Rey has found that Business Solutions’s line of computer desks and chairs has become very popular, and she is finding it hard to keep up with demand

Expert Solution

Archived Solution

	Desks			Chairs
Selling price per unit	$	1,125		$	375
Variable costs per unit		500			200
Contribution margin per unit	$	625		$	175
Direct labor hours per unit		5	hours		4	hours
Expected demand for next quarter		175	desks		50	chairs

	desk	chairs


contribution per DL
	desk	chairs	total
maximum units to be sold	175	50
hours required to produce maximum
For most profitable sales mix:
	desk	chairs	total
hours dedicated to the product			1015
units produced
contribution margin per unit
total contribution margin

Solution

Step-1
	Desks		Chairs
Selling price per unit	1,125		375
Variable costs per unit	500		200
Contribution margin per unit	625		175
Direct labor hours per unit	5	hours	4	hours
Contribution Per Labour hour	125		43.75
Rank Based on Contribution per Labour Hour	1		2

From the above calculation it is clear that desks have more contribution per limiting factor here labour hour
So desks ranked 1 and Chairs ranked 2.
So in order to maximise profit we have to produce desks to the maximum demand and Chairs for the balance labour hours.

Step-2
Total Labour hours Available	1015	hours

Number of Desks to be produced	175	desks
Direct labor hours per unit	5	hours
Total Labour hours for Desks	875	hours

Balance hours Available	140	hours	(1015-875)
Direct labor hours per unit	4	hours
Number of Desks to be produced	35	Chairs	(140/4)

Step-3
	Desks	Chairs
hours dedicated to the product	875	140	1015
units produced	175	35
contribution margin per unit	625	175
total contribution margin