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	69,000	$	41.00	$	4.60	$	4.00
Trish	61,000	$	4.50	$	1.50	$	1.00
Sarah	54,000	$	30.50	$	9.29	$	7.00
Mike	46,800	$	15.00	$	3.90	$	5.00
Sewing kit	344,000	$	9.90	$	5.10	$	0.50

The following additional information is available:  

1. The company’s plant has a capacity of 100,400 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 $10 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $575,000 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?

5. Assuming that the company has made optimal use of its 100,400 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

Req 1: Computation of Direct Labour Hours require per Unit
	Debbie	Trish	Sarah	Mike	Sewing kit
Direct labour cost (a)	4	1	7	5	0.5
labour rate per hour (b)	10	10	10	10	10
Hours required per unit (a/b)	0.4	0.1	0.7	0.5	0.05
Req 2: Computation of Variable OH Cost incurred to manufacture one Unit
	Debbie	Trish	Sarah	Mike	Sewing kit
Direct labour cost	4	1	7	5	0.5
labor rate per hour	10	10	10	10	10
Hours required per unit (a)	0.4	0.1	0.7	0.5	0.05
variable Overhead Cost per hour (b)	2	2	2	2	2
Variable Cost per unit (axb)	0.8	0.2	1.4	1	0.1
Req 3: Computation of Contribution Margin per DLH
	Debbie	Trish	Sarah	Mike	Sewing kit
Selling Price per unit(a)	41	4.5	30.5	15	9.9
Less: Variable cost
Material	4.6	1.5	9.29	3.9	5.1
labour	4	1	7	5	0.5
Variable Oh	0.8	0.2	1.4	1	0.1
Total Variable Cost (b)	9.4	2.7	17.69	9.9	5.7
Contribution margin per unit (c=a-b)	31.6	1.8	12.81	5.1	4.2
Labour hour per unit (d)	0.40	0.10	0.70	0.50	0.05
Contribution margin per hour (c/d)	79.00	18.00	18.30	10.20	84.00
Ranking	II	IV	III	V	I

Req 4:
Total labour hourrs available	100400
Less: Utilized as per ranking
Sewing Kit (0.05X 344000)	17200
Debbie (0.40X 69000)	27600
Sarah (0.70X 54000)	37800
Trish (0.1X 61000)	6100
Hours available for mike	11700
Computation of Contribution earned:
Product	Hour Utilized	CM per hour	Total contribution
Debbie	27,600	79.00	21,80,400
Trish	6,100	18.00	1,09,800
Sarah	37,800	18.30	6,91,740
Mike	11,700	10.20	1,19,340
Sewing kit	17,200	84.00	14,44,800
			45,46,080

Req 5:
Additional hours will be utilized in Mike production. Therefore,, management is ready to pay additional amount upto contribution per hour earned from Mike.
Maximum rate per hour:
Existing rate:- $10
Contribution margin per hr for Mike : $10.20
Maximum rate per hour: ($10+$10.20)= $20.20