Taylor Furniture produces and sells specialty mattresses.
Production is a machine-intensive process. Taylor's variable costs are direct material costs,variable machining costs, and sales commissions. Marion Taylor, the owner,is planning production for the coming year and collects the following data:
Estimated Demand Direct Material Var. Machining(units) Selling Price cost per unit cost per unit Nealy 1; 800 3; 000 $750 $600 Tersa 4; 500 2; 100 500 500 Pelta 39; 000 800 100 200 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 machine. Variable machining costs are $200 per hour. Taylor Furniture holds negligible inventories to minimize business risk.
Required:
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 per needed basis. What is the maximum amount that Marion Taylor would be willing to pay for each hour of additional machining capacity in the coming year?