Reference no: EM132523888

Diana has recently followed a course in furniture making and has decided to set up her own workshop from which she will be producing wooden chairs. She starts renting a small workshop at an annual rental cost of $6,000, business rates amount to $1,000 per annum, while workshop heating and lighting will cost $800 annually.

The direct cost information for one wooden chair is given below:

                                                 $

Direct materials: Wood                 18

Glue                                          0.6

Screws                                       1

Sandpaper                                0.4

Direct labour                             25

• Diana decides that her workshop is capable of producing a normal output of 1000 chairs annually.
• Diana is expanding fast and has more orders than she can currently fulfill with only 2 employees. She now has annual orders for 1500 chairs at a price of $85. She is considering whether to take a third employee. This decision will not increase her fixed costs as she has spare capacity to accommodate another two workers. Best Woods, another furniture-maker, has offered to make the additional 500 chairs for Diana and sell them at a cost of $49 each. Diana is quite happy with this proposal as she knows her total product cost per unit is higher than the proposed price.

Question 1: Advise Diana whether she should employ the additional worker and do the annual production herself or buy them from Best Woods. Your answer should be supported by both financial and non-financial reasons.