Reference no: EM132804738

Question - Antique Furnishings Ltd. is a Yuen Long based manufacturer making three unique wood products: bed-frames, coffee tables, footstools. These products are completely carved by hand by skilled craftspeople who have been trained in making these products. Since it takes about a year to train each craftsperson, the labour cost is a fixed production constraint over the short term. For the year ended 31 December 2019, the company expects to have 34,000 available labour hours. The average hourly labour rate is $25. Information regarding the current product line is as follows:

	Bed-frames $	Coffee tables $	Footstools $
Selling price	900	680	240
Variable costs:
Direct material	220	160	60
Direct manufacturing-labour costs	300	275	75
Indirect manufacturing-labour costs	80	40	21
Other indirect manufacturing costs	100	80	20
Variable selling expense	20	15	10

Variable manufacturing costs are variable with respect to units produced. Variable selling expenses are variable with respect to units sold. Fixed costs:

Indirect manufacturing-labour costs 80,000

Other indirect manufacturing costs 70,000

Selling & administration 75,000

Required -

a. Compute the contribution margin per unit for each of the three products above.

b. Assuming that the market demand exceeds the company's production capacity for all products, determine the number of units of each product that the company should make. Calculate the profit before tax based on your determination of units of each product.

c. Assuming that the company has a policy of devoting between 20% to 50% of its available skilled labour capacity to one product, determine the number of units of each product that the company should make and calculate the maximum profit before tax.

d. Discuss how managers decide whether a cost is a direct or an indirect cost and describe the factors that will affect the classification of a cost as direct or indirect.