Diana's business has grown significantly and she is now a successful producer of wooden

dining chairs, coffee tables and kitchen cabinets. However, a new government regulation

has introduced restrictions on the use of wood with the aim of preserving the natural

environment. Diana is therefore facing a shortage of wood, her main raw material.

The expected demand, selling price and variable costs for her three products are as follows:

Dining chair Coffee table Kitchen Cabinet

Expected Demand 580 500 900

Selling Price($) 85 50 80

Materials(Wood)($) 18 12.60 10.80

Materials(other)($) 2 5.40 9.20

Direct Labour 25 18 30

All three products use the same type of wood at a cost of $1.80 per kg. The government has

allocated Diana a maximum of 12,600 kgs of wood. Diana is considering diverting all her

production into dining chairs as these provide the highest selling price.

(a) Show that there is a shortfall of materials. Find the optimum production plan for

Diana, and calculate the resulting total contribution.

Diana's friend, using her marketing knowledge has recently undertaken, at the cost of

$3,000, a detailed analysis of the emerging trends in the furniture industry. Based on the

findings, she suggested that, to remain competitive, the business must add at least one new

type of furniture to its existing product mix. Working together with Diana, who has some

accounting and finance knowledge, she has come up with two propositions, the Cora and

the Dona, which are new design wooden center tables. Due to limited funds, Diana must

select only one project.

The Cora is expected to be produced and sold in monthly batches of 5,000 units. Selling

price is expected to be $12 in the first 2 years, rising by 5% each year in the following 3

years. Variable production costs would amount to $8 per unit and this is expected to rise by

3% annually over the next 5 years. A special wood cutting machine will have to be bought

immediately, costing $900,000 and scrap value is expected to be $50,000 at the end of its

lifetime.

The Dona will require investment in a new machine costing $500,000, scrap value being $

25,000. Monthly production is expected to be 4,000 units. Since it will be using better wood

quality, variable costs are expected to be $10 per unit, rising by 5% each year. Selling price

would be $13 and this is expected to remain constant.

Both projects would necessitate additional working capital of $50,000 immediately, which will

be recovered in full at the end of the project's life.

Diana is of the view that since Dona requires lower investment and has a higher selling

price, it will be more profitable to invest in this project.

Required: Advise Diana which project is the better investment, supporting your

answer with relevant calculations.