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Product mix, constrained resource

Finance

Product mix, constrained resource.  

Taylor Furniture produces and sells specialty mattresses.  Production is a machineintensive 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:

 

 

Estimated Demand (units)

Selling Price

Direct

Material

Cost Per Unit

Variable

Machining

Cost Per Unit

Nealy

1,800

$3,000 

$750 

$600 

Tersa

4,500

$2,100 

$500 

$500 

Pelta

39,000

$800 

$100 

$200 

 

    • Salespeople are paid a 5% commission on each Nealy or Tersa sold, and a 10% commission on each Pelta sold.  All other marketing and administrative costs are fixed and, along with the fixed manufacturing costs, total $8,750,000.

 

    • Annual capacity is 50,000 machine-hours, which is limited by the availability of machines.  Variable machining costs are $200 per hour.

 

    • Taylor Furniture holds negligible inventories to minimize business risk. 

 

    1. Calculate the machine-hours required to satisfy the estimated demand for each type of mattress.  
    2. What is the contribution margin per unit earned from each type of mattress?

 

    1. Determine the optimal product mix for Marion Taylor.  

 

Suppose Taylor Furniture can lease additional machining capacity on an asneeded basis.  What is the maximum amount that Marion Taylor would be willing to pay for each hour of additional machining capacity in the coming year?                

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