Lim Co. manufactures and sells standard and distinctive cues. Both of these cues use the same type of good quality ash. The supply of ash is restricted to 5500kg per period. Ash costs RM50 per kg.
The cues are made by skilled labours who are well known for their workmanship. The skilled labours take years to train and are difficult recruits. Lim Co.'s labours are only able to work for 12,000 hours in a period. The labours are paid RM18 per hour.
Lim Co. sells cues to a large market, demand for the cues is strong and in any period, up to 15,000 standard cues and 15,000 distinctive cues could be sold. The selling price for standard cues and distinctive cues are RM45 and RM75, respectively.
Manufacturing details for the two products are as follows:
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Standard cues
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Distinctive cues
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Labours time per cue
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0.5 hours
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0.75 hours
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Ash
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250g
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250g
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Other variable costs per cue
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RM1.50
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RM4.50
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The company does not keep inventory.
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Some of the labours have offered to work overtime, provided that they are paid double time for the extra hours over the contracted 12,000 hours. Lim Co. has estimated that up to 1,000 hours per period could be gained in this way.
You are required to write a suggestion report:
Advise Lim whether to accept the labours' initial offer of working overtime. Support your argument with the Linear Programming Graph. Your report should include the following points:
Discussion on the rate of pay requested, the quantity of hours and optimal production.
Some computations; e.g. contribution margin for each cue, maximum contribution earned.
Critically evaluate on the shadow price of the labours and the materials.
Support your arguments with relevant and valid sources from academic journal articles.