Blasius Ltd is a leading manufacturer of furniture in Ghana. The company manufactures these three garden furniture products – chair, bench and table. The budgeted unit cost and resource requirements of each of these items are detailed below:
These volumes are believed to equal the market demand for these products.
Fixed overhead costs are attributed to the three products on the basis of direct labour hours.
The cost of the timber is GH¢2.00 per square metre.
The products are made from a specialized timber. A memo from the purchasing manager advises you that because of a problem with the supplier, this specialized timber is limited in supply to 20,000 square metres per annum.
The sales director has already accepted an order for 500 chairs, 100 benches and 150 tables which if not supplied would incur a financial penalty of GH¢2,000. These quantities are NOT included in the market demand estimates above.
The selling prices of the three products are:
Chair GH¢20.00
Bench GH¢50.00
Table GH¢40.00
A timber merchant from Takoradi made a proposal to Blasius Ltd to supply this specialize timber which is in short supply but at the cost of GH¢4.5 per square metre.
Required:
i) Explain the term shadow price. (2 marks)
View Solution
Shadow price is also known as maximum price or dual price. It’s a maximum amount more than normal price to be paid to obtain one unit of scarce resources when it became available. The shadow price is the price at which the purchaser makes a nil contribution from it use.
Management can use the shadow price as a measure of how much they would be pay to gain more of a scare resources over and above the normal price subject to any non- financial issues.
ii) Identify the shadow price which should be paid per square metre and comment on the acceptability of the offer. (4 marks)
View Solution
The present situation is that demand for chairs and tablets is fully satisfied from the existing resources, but there is some unsatisfied demand for benches. Thus any additional timber would be used to manufacture more benches.
Based on the current input cost of GH¢2.00 per 𝑚2 each of timber earns a contribution of GH¢2.33. Thus the maximum price to be paid is the sum of these value; GH¢4.33 per 𝑚2.
