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 70,000 $ 38.00 $ 4.70 $ 3.50 Trish 62,000 $ 4.60 $ 1.60 $ 1.00 Sarah 55,000 $ 31.00 $ 9.44 $ 6.50 Mike 48,000 $ 14.00 $ 4.00 $ 4.50 Sewing kit 345,000 $ 10.00 $ 5.20 $ 0.50 The following additional information is available: The company’s plant has a capacity of 94,500 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products. The direct labor rate of $10 per hour is expected to remain unchanged during the coming year. Fixed manufacturing costs total $585,000 per year. Variable overhead costs are $3 per direct labor-hour. All of the company’s nonmanufacturing costs are fixed. The company’s finished goods inventory is negligible and can be ignored.

Please do questions 4 and 5 ONLY.

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? 5. Assuming that the company has made optimal use of its 94,500 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)?

Answer 1

4
Highest total contribution margin =$4370300
5
Highest price = $19.22 per DLH
Workings:
	Debbie	Trish	Sarah	Mike	Sewing Kit
Selling price	38.00	4.60	31.00	14.00	10.00
Variable costs:
Direct materials	4.70	1.60	9.44	4.00	5.20
Direct labor	3.50	1.00	6.50	4.50	0.50
Variable overhead	1.05	0.30	1.95	1.35	0.15
Total variable costs	9.25	2.90	17.89	9.85	5.85
Contribution margin	28.75	1.70	13.11	4.15	4.15
Direct labor hours per unit	0.35	0.10	0.65	0.45	0.05
Contribution margin per DLH	82.14	17.00	20.17	9.22	83.00
Product	DLH Per Unit	Estimated Sales (units)	Total Hours
Debbie	0.35	70000	24500
Trish	0.10	62000	6200
Sarah	0.65	55000	35750
Mike	0.45	48000	21600
Sewing kit	0.05	345000	17250
Total hours required			105300
The production and sale of Mike should be reduced as it provides least Contribution margin per DLH
Reduction in production = (105300-94500)/0.45= 24000
Product	Estimated Sales (units)	Contribution margin per unit	Total Contribution margin
Debbie	70000	28.75	2012500
Trish	62000	1.70	105400
Sarah	55000	13.11	721050
Mike	24000	4.15	99600
Sewing kit	345000	4.15	1431750
		Total	4370300
Highest price = Normal price paid+Contribution margin per DLH for Mike = 10+9.22 = $19.22