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	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:  

1. 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.

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

3. Fixed manufacturing costs total $560,000 per year. Variable overhead costs are $3 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?

Debbie = 0.60 Trish = 0.20 Sarah= 0.90 Mike = 0.70 Sewing Kit = 0.15

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

Debbie = $1.80 Trish = $0.60 Sarah = $2.70 Mike = $2.10 Sewing Kit = $0.45

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

Debbie = $18.50 Trish = $5.50 Sarah = $13.51 Mike = $4.57 Sewing Kit = $20.00

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? NEED ASSISTANCE TO ANSWER THIS QUESTION

5. Assuming that the company has made optimal use of its 136,550 direct labor-hours, what is the highest direct labor rate per hour that Walton Toy Company would be willing to pay for additional capacity (that is, for added direct labor time)?

$13.57 per hour

Answer 1

Statement showing the ranking based on the constraint given:

	Debbie	Trish	Sarah	Mike	Sewing Kit	Total
Sale Price per unit	$23	$5	$30	$14	$8.4
Less: Variable Cost per unit
Direct materials	$4.70	$1.50	$7.04	$2.40	$3.60
Direct labor	$5.40	$1.80	$8.10	$6.30	$1.35
Variable overhead	$1.80	$0.60	$2.70	$2.10	$0.45
Total Variable Cost per unit	$11.90	$3.90	$17.84	$10.80	$5.40
Contribution margin per unit	$11.10	$1.10	$12.16	$3.20	$3.00
Direct Labor hours required per unit	0.60	0.20	0.90	0.70	0.15
Contribution per Direct Labor Hour	18.50	5.50	13.51	4.57	20.00
Ranking Based on above contribution	II	IV	III	V	I

Calculation of total contribution margin of the company using the optimal use of resource (labor hours):

	Debbie	Trish	Sarah	Mike	Sewing Kit	Total
a. Demand (in units)	54,000	46,000	39,000	30,000	329,000	498,000
b. Direct Labor hours required per unit	0.60	0.20	0.90	0.70	0.15
c. Total hours required (a * b)	32,400	9,200	35,100	21,000	49,350	147,050
d. Total hours available (Given)						136,550
e. Shortfall of Labor hours (c - d)						10,500
f. Available hours alloted based on rank	32,400	9,200	35,100	10,500 (Balance figure)	49,350	136,550
g. Number of units produced (f / b)	54,000	46,000	39,000	15,000	329,000	483,000
h. Contribution margin per unit	$11.10	$1.10	$12.16	$3.20	$3
i. Total contribution (g * h)	$599,400	$50,600	$474,240	$48,000	$987,000	$2,159,240