Hust Ltd currently manufactures a single product, garden chairs. It is now considering increasing its product range
Question:
Hust Ltd currently manufactures a single product, garden chairs. It is now considering increasing its product range to include garden tables.
Estimated revenues/costs per unit for its next financial year are:
| Garden Chairs $ | Garden Tables $ | |
| Annual sales(units) | 15000 | 6000 |
| selling price | 56 | 62 |
| material cost | 22 | 20 |
| labour cost | 12 | 16 |
| variable overheads | 6 | 8 |
The labour rate for each product is based on a normal hourly rate of $8. If the existing product only is produced, then fixed costs are estimated to be $130 000 for the year.
If the new product is added to production, then fixed costs would increase to $180 000 for the year. The company has a maximum number of 30 000 hours available.
Required
(a) Calculate the annual profit if Hust Ltd continues to produce garden chairs only. Show the contribution per unit in your calculations.
(b) Calculate the annual maximum profit if Hust Ltd produces garden chairs and garden tables.
(c) Discuss whether Hust Ltd should increase its product range to include garden tables.
Expert Answer:
a To calculate the annual profit if Hust Ltd continues to produce garden chairs only we first need to calculate the profit per unit or contribution ma... View the full answer
