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?
3. Advise Marion Taylor about the most profitable production levels of the three products.
4.Suppose Taylor Furniture can lease additional machining capacity on an as-needed basis. What is the maximum amount that Marion Taylor would be willing to pay for each hour of additional machining capacity in the comingyear?
lly Tersa. The optimal product mix will be as follows: Nealy 1,800 units = 5,400 MH Pelta 39,000 units = 39,000 MH Tersa 2,240 (5,600 MH ÷ 2.5 MH/unit) units = 5,600 MH (50,000 - 5,400 - 39,000) Total 50,000 MH 4. The optimal product mix in Part 3 satisfies the demand for Nealy and Pelta and leaves only 2,260 units (4,500 - 2,240) of Tersa unfilled. These remaining units of Tersa require 5,650 machine hours (2,260 units* 2.5 MH per unit). The maximum price Marion Taylor is willing to pay for extra machine hours is $398, which is the unit contribution per machine hour for additional units of Tersa. That is, total cost per machine-hour for these units will be $398 + $200 (variable cost per machine-hour) = $598 per machine-hour.