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	64,000	$	22.00	$	4.10	$	3.20
Trish	56,000	$	8.00	$	2.50	$	1.04
Sarah	49,000	$	38.50	$	8.54	$	5.60
Mike	45,600	$	13.00	$	3.40	$	4.00
Sewing kit	339,000	$	9.40	$	4.60	$	0.64

The following additional information is available:  

1. The company’s plant has a capacity of 105,700 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 $8 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $525,000 per year. Variable overhead costs are $5 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 105,700 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

1)
				Debbie	Trish	Sarah	Mike	Sewing kit
direct labor cost per unit				3.2	1.04	5.6	4	0.64
direct labor rate per hour				8	8	8	8	8
direct labor hrs per unit				0.4	0.13	0.7	0.5	0.08
2)	variable overhead cost incurred
				Debbie	Trish	Sarah	Mike	Sewing kit
variable overhead cost per hour				5	5	5	5	5
direct labor hours per unit				0.4	0.13	0.7	0.5	0.08
variabe overhead cost incurred				2	0.65	3.5	2.5	0.4
3)	total contribution margin
Selling price				22	8	38.5	13	9.4
less:Variable costs
direct materials				4.1	2.5	8.54	3.4	4.6
direct labor				3.2	1.04	5.6	4	0.64
variable overhead				2	0.65	3.5	2.5	0.4
total variable costs				9.3	4.19	17.64	9.9	5.64
contribution margin per unit				12.7	3.81	20.86	3.1	3.76
direct labor hours per unit				0.4	0.13	0.7	0.5	0.08
contribution margin per hours				31.75	29.31	29.80	6.20	47.00	answer
Ranking				2	4	3	5	1

4)			DLH per	estimated	total
	product		unit	sale units	hours
	Debbie		0.4	64,000	25600
	trish		0.13	56,000	7280
	Sarah		0.7	49,000	34300
	mike		0.5	22,800	11,400
	sewing kit		0.08	339,000	27120
	total hours required				105,700
					Allocated	units	contribut	total
					total	produced	per unit	contribution
	product				hours
	Debbie				25,600	64,000	12.7	812800
	trish				7,280	56,000	3.81	213360
	Sarah				34,300	49,000	20.86	1022140
	mike				11,400	22,800	3.1	70680
	sewing kit				27,120	339,000	3.76	1274640
	total hours required				105,700			3393620	answer
5)
	highest price will be		$8direct labor rate +$6.20 contribution margin per hours
			14.2	answer