MAA262 – Management Accounting Assessment Task 2

Question 6

The Furniture Division for New Stone Manufacturing (NSM) can produce two different types of chairs, the Stylish Chair which is more fancy and attractive to young customers, and the Standard Chair, which is durable and sells at a lower price . There is a question regarding how many should the Furniture Division produce for each product.

Table 1 – Chairs Production
Per unit of chair                                          Stylish Chair                                     Standard Chair
Sales price                                                        $500.00                                           $300.00
Variable expenses                                         $200.00                                           $150.00
Contribution margin                                    $300.00                                           $150.00
Contribution margin ratio                            60%                                                      50%

You are analysing the product-mix options under specific capacity constraints: one unit of Stylish Chairrequires 8 machine hours and one unit of Standard Chair requires 5 machine hours; the Furniture Division has 10,000 machine hours available to produce these products. NSM also requires the Furniture Division to produce at least 200 units for each kind of chair.

Required

How many units of Stylish Chair and Standard Chair should the Furniture Division at NSM produce for maximizing the division profit and why? Use your calculations for supporting your argument and showing the maximum contribution margin (i.e., total revenues minus variable expenses) the Furniture Division can
achieve. (Product-mix decisions under capacity constraints, 10 marks)