In addition to the tables and chairs provided by the Furniture Division, New Stone Manufacturing (NSM) also manufactures a wide range of products, including household appliances, recreational products, and electronic games. Marathon is a division under New Stone Manufacturing (NSM) that focuses on electronic games. Under COV-19, electronic games that involve physical exercises are gaining popularity. New Stone Manufacturing (NSM) thus has been encouraging Marathon to diversify the lines of electronic games. Attraction is a start up company that focuses on electronic sport games and it is looking for a friendly buyer. New Stone Manufacturing (NSM)’s top management believes that Attraction would be a valuable addition to their existing portfolio and has strongly urged William Crook, the divisional manager of Marathon, to consider acquiring Attraction. William has reviewed the financial statements of Attraction and he believes that the acquisition may not be in the best interests of Marathon.

New Stone Manufacturing (NSM) has always evaluated the divisions on the basis of division ROI. The management team of any division that reports an annual increase in their ROI is given a bonus, but the managers of divisions where the ROI declines must provide a very convincing explanation as to why they should get a bonus. Where ROI has declined, the bonus is limited to only 50 per cent of the bonus that is paid to the divisions that report an increase in ROI.

William thus explains his concerns to his divisional management team: ‘If only we could convince them to base our bonuses on something other than ROI, this acquisition would look more attractive. If only our bonuses were based on residual income, using the company’s required rate of return of 15 percent.

The following data relate to the most recent financial year:

Attraction Marathon

Sales revenue 4,550,000 15,250,000

Less

Variable expense 1,850,000 9,000,000

Fixed expense 1,800,000 3,250,000

Operating profit		900,000	3,000,000
Total assets in the division		5,000,000	12,000,000

You have been assigned for reviewing the actual and budgeted figures of the variable manufacturing overhead of Standard Chair in the Furniture Division for New Stone Manufacturing (NSM).

You have been assigned for reviewing the actual and budgeted figures of the direct labour cost for manufacturing Standard Chairs at in the Furniture Division for New Stone Manufacturing (NSM). The management at NSM argues there are no evident issues with the direct labour cost budget because the staticbudget variance is often favourable, which proves the budgeting process works quite well. The management at NSM also argues the employees at the production line of Standard Chairs are always highly efficient because of the consistently favourable efficiency variances.

Your analysis is for a specific month of the year, comparing the budgeted and actual figures. For the specific month of the year, each Standard Chair is budgeted to take 5 labour-hours. Budgeted hourly wage is $30. The budgeted number of Standard Chairs to be manufactured in this given month is 120.

Actual direct labour costs in the given month were $15,680 for 100 Standard Chairs started and completed. There was no opening or closing stock. Actual direct manufacturing labour-hours for this given month were 490.

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 Chair requires 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)