Question

Soft and Cuddly Friends (SCF) produces soft dolls. Demand for the dolls is increasing, and management wants you to identify an economical sales and production mix for the coming year. The following information is available:

		Softy		Friendly		Goody		Besty		Lovey
Demand (units)		90,000		74,800		63,000		72,000		128,000
Price per unit	$	51.00	$	44.00	$	41.00	$	27.00	$	37.00
Variable costs:
Direct materials		6.90		6.10		9.90		7.90		5.70
Direct labour		7.60		4.75		13.30		9.50		3.80

The following additional information is available:

a.	The company’s plant has a capacity of 130,000 direct labour-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.
b.	The direct labour rate is $19 per hour; this rate is expected to remain unchanged during the coming year.
c.	Fixed manufacturing costs amount to $880,000 per year. Variable overhead costs are $9 per direct labour-hour.
d.	All of the company’s sales and administrative costs are fixed.

Required:

1.	How many total direct labour-hours will be required to produce the units estimated to be sold during the coming year? Show your computations. (Round your answers to 2 decimal places.)

2.	Keeping in mind the direct labour-hour capacity, what should be the company’s product mix for the upcoming year? Prepare a schedule in support of your recommendation. (Round "Per Unit" to 2 decimal places.)

3.	What is the highest price, in terms of a rate per hour, that SCF would be willing to pay for additional capacity (i.e., for added direct labour time)?

4.	Assume again that the company does not want to reduce sales of any product. Identify ways the company could obtain the additional output. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

	Adding another shift

	Contracting out some work to outside suppliers

	Employing additional labour force

	Expanding the workforce

	Eliminating wasted labour time in the production process

	Utilizing the unutilized capacity

Working overtime

     

Answer 1

1)Total direct labor-hours will be required to produce the units estimated to be sold:
	Softy	Friendly	Goody	Besty	Lovey
a) Direct labor per unit	7.60	4.75	13.30	9.50	3.80
b) Direct labor rate	$19	$19	$19	$19	$19
c) Direct labor hours required per unit[a/b]	0.40	0.25	0.70	0.50	0.20
d) Estimated demand (units)	90,000	74,800	63,000	72,000	128,000
e) Direct labor hours required[c*d]	36,000	18,700	44,100	36,000	25,600
f) Total direct labor hours	160,400 hours

2. Company’s product mix:
		Demand	Labor hrs. required	Labor hrs. used	Balance hours
Maximum capacity					130,000
Lovey		128,000	0.20	25,600	104,400
Friendly		74,800	0.25	18,700	85,700
Softy		90,000	0.40	36,000	49,700
Goody		63,000	0.70	44,100	5,600
Besty		11,200	0.50	5,600	-
Calculation of contribution per direct labor hour:
	Softy	Friendly	Goody	Besty	Lovey
Sale price per unit	$ 51.00	4.75	13.30	9.50	3.80
Less: Direct Material per unit	$ 6.90	$ 6.10	$ 9.90	$ 7.90	$ 5.70
Less: Direct labor per unit	$ 7.60	$ 4.75	$ 13.30	$ 9.50	$ 3.80
Contribution per unit	$ 36.50	$ 33.15	$ 17.80	$ 9.60	$ 27.50
Direct labor hours per unit(in hours)	0.40	0.25	0.70	0.50	0.20
Contribution per direct labor hour	$ 91.25	$ 132.60	$ 25.43	$ 19.20	$ 137.50
Rank	3	2	4	5	1

3. 3. The highest price which the company would willing to pay for additional capacity is equal to the contribution received per direct labor hour from Besty i.e. $ 19.20