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	66,000	$	37.00	$	4.30	$	3.50
Trish	58,000	$	5.00	$	1.20	$	0.84
Sarah	51,000	$	35.50	$	8.84	$	5.60
Mike	37,000	$	15.00	$	3.60	$	4.20
Sewing kit	341,000	$	9.60	$	4.80	$	0.49

The following additional information is available:  

The company’s plant has a capacity of 115,730 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 $7 per hour is expected to remain unchanged during the coming year.

Fixed manufacturing costs total $545,000 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.

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 115,730 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:
				DEBBIE	TRISH	SARAH	MIKE	SEWING KIT
Direct labour cost per unit				3.5	0.84	5.6	4.2	0.49
Labour rate per hour				7	7	7	7	7
Labour hours required per unit				0.5	0.12	0.8	0.6	0.07
(Labour cost per unit/ Labour rate)
Req 2:
				DEBBIE	TRISH	SARAH	MIKE	SEWING KIT
Direct labour cost per unit				3.5	0.84	5.6	4.2	0.49
Labour rate per hour				7	7	7	7	7
Labour hours required per unit				0.5	0.12	0.8	0.6	0.07
Variable OH cost per hour				3	3	3	3	3
variable OH per unit				1.5	0.36	2.4	1.8	0.21
(Labour hour per unit*Variable OH rate per hour)
Req 3:
				DEBBIE	TRISH	SARAH	MIKE	SEWING KIT
Selling price				37	5	35.5	15	9.6
Less: Variable cost perunit
material				4.3	1.2	8.84	3.6	4.8
Labour				3.5	0.84	5.6	4.2	0.49
variable OH				1.5	0.36	2.4	1.8	0.21
Contribution margin per unit				27.7	2.6	18.66	5.4	4.1
Labour hours per unit				0.5	0.12	0.8	0.6	0.07
Contribution margin per hour				55.4	21.66667	23.325	9	58.57143
(CM per unit/ Labouor hour)
Ranking				II	IV	III	V	I
Req 4:
				DEBBIE	TRISH	SARAH	MIKE	SEWING KIT	Total
maximum demand				66000	58000	51000	37000	341000
Labour hours per unit				0.5	0.12	0.8	0.6	0.07
Total Labour hours required				33000	6960	40800	22200	23870	126830
Less: Available hours									115730
Labour hours shortage (to be adjusted from Last ranking product i.e. Mike)									11100
Labour hours used in each product				33000	6960	40800	11100	23870
Contribution margin per hour				55.4	21.67	23.325	9	58.57
Total contribution margin earned				1828200	150823.2	951660	99900	1398066	4428649
Req 5:
From additional hours, theh company can product Mike Porduct.
Therefore, highest rate which the company would be willing is $9 per hourr (the contribution margin per hour off Mike)