Question

The Walton Toy Company manufactures a line of dolls and a sewing kit. Demand for the company’s products is increasing, and management requests assistance from you in determining an economical sales and production mix for the coming year. The company has provided the following data:

Product	Demand Next year (units)	Selling Price per Unit		Direct Materials		Direct Labor
Debbie	61,000	$	20.00	$	5.40	$	3.60
Trish	53,000	$	6.50	$	2.20	$	1.44
Sarah	46,000	$	33.50	$	8.09	$	6.30
Mike	44,400	$	14.00	$	3.10	$	4.50
Sewing kit	336,000	$	9.10	$	4.30	$	0.99

The following additional information is available:  

1. The company’s plant has a capacity of 113,140 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.

2. The direct labor rate of $9 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $630,000 per year. Variable overhead costs are $2 per direct labor-hour.

4. All of the company’s nonmanufacturing costs are fixed.

5. The company’s finished goods inventory is negligible and can be ignored.

Required:

1. How many direct labor hours are used to manufacture one unit of each of the company’s five products?

2. How much variable overhead cost is incurred to manufacture one unit of each of the company’s five products?

3. What is the contribution margin per direct labor-hour for each of the company’s five products?

4. Assuming that direct labor-hours is the company’s constraining resource, what is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?

Answer 1

1)
				Debbie	Trish	Sarah	Mike	Sewing kit
direct labor cost per unit				3.6	1.44	6.3	4.5	0.99
direct labor rate per hour				9	9	9	9	9
direct labor hrs per unit				0.4	0.16	0.7	0.5	0.11
2)	variable overhead cost incurred
				Debbie	Trish	Sarah	Mike	Sewing kit
variable overhead cost per hour				2	2	2	2	2
direct labor hours per unit				0.4	0.16	0.7	0.5	0.11
variabe overhead cost incurred				0.8	0.32	1.4	1	0.22
3)	total contribution margin
Selling price				20	6.5	33.5	14	9.1
less:Variable costs
direct materials				5.4	2.2	8.09	3.1	4.3
direct labor				3.6	1.44	6.3	4.5	0.99
variable overhead				0.8	0.32	1.4	1	0.22
total variable costs				9.8	3.96	15.79	8.6	5.51
contribution margin per unit				10.2	2.54	17.71	5.4	3.59
direct labor hours per unit				0.4	0.16	0.7	0.5	0.11
contribution margin per hours				25.50	15.88	25.30	10.80	32.64	answer
Ranking				2	4	3	5	1

4)			DLH per	estimated	total
	product		unit	sale units	hours
	Debbie		0.4	61,000	24400
	trish		0.16	53,000	8480
	Sarah		0.7	46,000	32200
	mike		0.5	22,200	11,100
	sewing kit		0.11	336,000	36960
	total hours required				113,140
					Allocated	units	contribut	total
					total	produced	per unit	contribution
	product				hours
	Debbie				24,400	61,000	10.2	622200
	trish				8,480	53,000	2.54	134620
	Sarah				32,200	46,000	17.71	814660
	mike				11,100	22,200	5.4	119880
	sewing kit				36,960	336,000	3.59	1206240
	total hours required				113,140			2897600	answer