Question

The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for the dolls 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	54,000	$23.00	$4.70	$5.40
Trish	46,000	$ 5.00	$1.50	$1.80
Sarah	39,000	$30.00	$7.04	$8.10
Mike	30,000	$14.00	$2.40	$6.30
Sewing kit	329,000	$ 8.40	$3.60	$1.35

  

The following additional information is available:

a.	The company’s plant has a capacity of 136,550 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.
b.	The direct labor rate of $9 per hour is expected to remain unchanged during the coming year.
c.	Fixed costs total $560,000 per year. Variable overhead costs are $3 per direct labor-hour.
d.	All of the company's nonmanufacturing costs are fixed.
e.	The company’s finished goods inventory is negligible and can be ignored.

  

Required:
1.	Determine the contribution margin per direct labor-hour expended on each product. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Product	Contribution Margin per DLH
Debbie
Trish
Sarah
Mike

Sewing kit

2.	Calculate the the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year. (Do not round intermediate calculations.)

Product	Total Hours
Debbie
Trish
Sarah
Mike
Sewing Kit
Total Hours Required

3.	Based on response to Requirement 1 & 2, how much of 136,550 direct labor hours of capacity will be allocated to Walton Toy Company’s various products?

  

Product	Hours
Debbie
Trish
Sarah
Mike
Sewing Kit

     

4.	What is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?

Total Contribution margin:

5.	What is the highest price, in terms of a rate per hour, that Walton Toy Company would be willing to pay for additional capacity (that is, for added direct labor time)? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Highest price: __________ per hour

  

Answer 1

1. Contribution Margin per DLH for each product:

Product	Demand Next year (a)	Selling Price (b)	Direct Materials (c)	Direct Labour (d)	Labour hour (e = d/$9)	Variable overhead cost (f = e*$3)	Total Variable cost (g=c+d+f)	Contribution Margin (h=b-g)	Contribution margin per DLH (i=h/e)
Debbie	54000	23	4.7	5.4	0.6	1.8	11.9	11.1	18.50
Trish	46000	5	1.5	1.8	0.2	0.6	3.9	1.1	5.50
Sarah	39000	30	7.04	8.1	0.9	2.7	17.84	12.16	13.51
Mike	30000	14	2.4	6.3	0.7	2.1	10.8	3.2	4.57
Sewing Kit	329000	8.4	3.6	1.35	0.15	0.45	5.4	3	20.00

2. The total direct labor-hours that will be required to produce the units estimated to be sold during the coming year:

Product	Demand Next year (a)	Labour hour (b)	Total DLH (a*b)
Debbie	54000	0.6	32400
Trish	46000	0.2	9200
Sarah	39000	0.9	35100
Mike	30000	0.7	21000
Sewing Kit	329000	0.15	49350

3. how much of 136,550 direct labor hours of capacity will be allocated to Walton Toy Company’s various products?

First, we need to rank the products based on the contribution margin per labour hour.

Product	Contribution margin per DLH	Rank
Debbie	18.50	2
Trish	5.50	4
Sarah	13.51	3
Mike	4.57	5
Sewing Kit	20.00	1

We need to allocate the resource to the products based on this rank to get max. profit.

Total Capacity = 136550 DLH

Product	Rank	Total DLH Required	Remaining hour after allocation	Hours Allocated
Sewing Kit	1	49350	87200	49350
Debbie	2	32400	54800	32400
Sarah	3	35100	19700	35100
Trish	4	9200	10500	9200
Mike	5	21000		10500

After 49350 hours has been allocated to Sewing kit product 87200 DLH still available.

After allocating 9200 hours to Trish 10500 is still available.

Therefore, all product expect Mike will get their required DLH. The product mike will get 10,500 DLH.

4. The highest total contribution margin that the company can earn:

Product	Hours Allocated	Contribution margin per DLH	Total Contribution Margin
Sewing Kit	49350	20.00	987000
Debbie	32400	18.50	599400
Sarah	35100	13.51	474201
Trish	9200	5.50	50600
Mike	10500	4.57	47985
		Total	2159186

5. What is the highest price, in terms of a rate per hour, that Walton Toy Company would be willing to pay for additional capacity?

Total Expected sales for product Mike is 30000. With 10500 hours allocated 15000 units can be produced. Let assume no profit or loss situation for the production of this remaining 15000 units.

Let X be the Highest rate per hour the company can pay,

Sales – Direct Material – Labour hour * X – Variable Overhead = 0

15000*14 – 15000*2.4 – 15000* 0.7* X – 15000*2.1 = 0

15000*9.1 – 10500X = 0

X = $13 per hour