(This serial problem began in Chapter I and continues through most of the book.

ID: 2601776 • Letter: #

Question

(This serial problem began in Chapter I and continues through most of the book. If previous chapter seg SERIAL PROBLEM ments were not completed, the serial problem can begin at this point.) Business Solutions SP 10 Santana Rey has found that Business Solutions's line of computer desks and chairs has become very popular, and she is finding i hard to keep up with demand. She knows that she cannot fill all of her orders for both items, so she dexides she must determine the optimal sales mix given the resources she has A1 available. Information about the desks and chairs follows. Desks Chairs Selling price per unit Variable costs per unt Contribution margin per unit Direct labor hours per unit Expected demand for next quarter $1,125 $375 500200 5 625 $175 5 hours 4 hours 175 desks 50 chairs © Alexander 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.

Explanation / Answer

SOLUTION:

Contribution per direct labor hour:

Desk: Contribution per unit/ Direct labor hour to produce one unit = 625/5 = $125

Chair: Contribution per unit/ Direct labor hour to produce one unit = 175/4 = $43.75

Because the desks have the highest contribution margin per direct labor hour used, thus the desk order should be done first, and consider the orders for the chairs.

Orders for desks

175

Direct labor hours required per desk

Total direct labor hours used for desks

875

Total direct labor hours available

1,015

Hours available for the production of chairs

140

Direct labor hours required per chair

Chairs that can be produced in that time.

Thus should produce 175 desks and 35 chairs. The contribution level will be:

Desk

Chairs

Total

Working

Sales

196,875

13125

210,000

175*1,125; 35*375

Variable cost

87,500

7000

94,500

175*500; 35*200

Contribution margin

109,375

6125

115,500