Luxury Chairs Limited is currently setting up a business to make and sell a range of chairs. The plan is to make two different types of chairs: Standard and Deluxe.

The following planning information has been prepared for first six months of trading.

Standard Chairs Deluxe Chairs

Selling Price 100 250

Materials per chair 30 75

Labour hours per chair 1 hour 3 hours

Manufacturing and Sales Plan Number of Chairs Number of Chairs

Month 1 2,000 600

Month 2 2,100 900

Month 3 2,600 700

Month 4 2,800 600

Month 5 1,900 600

Month 6 1,800 500

Overhead costs necessary to operate the business have been estimated as follows:

(i) Premises rent for the first six months of 104,000.

(ii) Machinery will be leased at a cost of 4,500 per month.

(iii) Marketing and advertising overheads of 31,000 for the first 6 months.

(iv) A specialist advisor to aid management will cost 5,250 per month.

(v) Other overheads are expected to amount to 30,000 per month.

Production labour, at estimated standard costing rates, costs 32 per hour if the standard production times are adhered to.

Required:

(a) Calculate the contribution per unit of both Standard and Deluxe chairs.

(b) Calculate the full cost per unit, of each type of chair, allocating overheads based on direct labour hours.

(c) Calculate the total profit or loss for the first six months of trade.

(d) Discuss the difference between contribution and profit.

(e) Explain and analyse the key reasons why managers require the full cost of eitherproduct of service.