QUESTION 5

Goose Company produces two products, namely goose down pillows and goose down duvets. The pillows and duvets are filled with high quality goose down, which they get from their goose farm. The goose farm is situated in the Karoo.

You are provided with the following information regarding the standard selling price, unit cost and contribution margin ratio for the products:

	Note	Pillows	Duvets
Selling price per product		R350	R1 400
Direct materials:
Goose down	1	R110	R450
White fabric cover	2	R52	R150
Thread	3	?	?
Direct labour	4	?	?
Manufacturing overhead cost	5	R25	R50
Selling and administrative costs	6	R10	R12
Contribution margin ratio		40%	?

Note 1: Goose down

When the goose down arrives at the manufacturing plant, it goes through three pre-wash processes to get it ready for use in the two products. The total cost of the goose down (including the cost of the cleaning processes) amounts to R100 per kilogram.

Note 2: White fabric cover

The white fabric covers for the pillows and duvets are purchased from an external supplier. Once received from the supplier, the white fabric cover is filled with the required amount of goose down, where after it is stitched at the top to close. The prices for the white fabric covers listed in the table above are the final purchase prices quoted by the supplier.

Note 3: Thread

The thread is used to stitch the white material covers once it has been filled with down. In total, each pillow requires 0.9 meters of thread and each duvet requires 4.2 meters of thread. The thread is purchased in spindles of 10 meters at a price of R100 per spindle.

Note 4: Direct labour

Both products are filled and stitched by production staff. The production staff receives a wage of R760 per 8-hour day. Each worker can produce five pillows in one hour. It takes a worker double the time to produce one duvet, compared to one pillow.

Note 5: Manufacturing overhead cost

The manufacturing overhead consists of variable and fixed overheads. 80% the amount per unit relates to variable manufacturing costs and the remainder is fixed manufacturing costs.

Note 6: Selling and administrativecost

All the selling and administrative costs are considered to be fixed.

REQUIRED:

2.1 Due to the extreme heat and drought in the Karoo, many geese died. As a result, Goose Company has only 15 tons of goose down available to use in the production of pillows and duvets. Goose Company has already received orders for 4 000 pillows and 2 600 duvets. Since customers only pay once an order is approved, Goose Companycan still decide how many pillows and duvets they should produce.

The contribution margin ratio for pillows is 40%.

1) Given the limited amount of goose down available, should Goose Company focus on meeting the orders for the pillows or duvets? Show all calculations to motivate your answer.

2) Given the orders already received, how many pillows and duvets should Goose Company produce to maximise their total contribution?