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	53,000	$	19.00	$	4.60	$	4.40
Trish	45,000	$	7.00	$	1.40	$	1.76
Sarah	38,000	$	29.00	$	6.89	$	6.80
Mike	32,000	$	13.00	$	2.30	$	5.20
Sewing kit	328,000	$	8.30	$	3.50	$	1.36

The following additional information is available:  

1. The company’s plant has a capacity of 137,510 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 $550,000 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 137,510 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	4.4	1.76	6.8	5.2	1.36
Direct labor rate per hour	8	8	8	8	8
Direct labor hrs per unit	0.55	0.22	0.85	0.65	0.17

2.

	Debbie	Trish	Sarah	Mike	Sewing kit
Variable overhead cost per hour	2	2	2	2	2
Direct labor hours per unit	0.55	0.22	0.85	0.65	0.17
Variable overhead cost incurred	1.1	0.44	1.7	1.3	0.34

3.

	Debbie	Trish	Sarah	Mike	Sewing kit
Selling price	19	7	29	13	8.3
Less: Variable costs
Direct materials	4.6	1.4	6.89	2.3	3.5
Direct labor	4.4	1.76	6.8	5.2	1.36
Variable overhead	1.1	0.44	1.7	1.3	0.34
Total variable costs	10.1	3.6	15.39	8.8	5.2
Contribution margin per unit	8.9	3.4	13.61	4.2	3.1
Direct labor hours per unit	0.55	0.22	0.85	0.65	0.17
Contribution margin per hours	16.18	15.45	16.01	6.46	18.24

4.

	Debbie	Trish	Sarah	Mike	Sewing kit
Ranking	2	4	3	5	1

Product	DLH per unit	Sale units	Total hours
Debbie	0.55	53,000	29150
Trish	0.22	45,000	9900
Sarah	0.85	38,000	32300
Mike	0.65	32,000	20800
Sewing kit	0.17	3,28,000	55760
Total hours required			147,910

Product	Allocated hours	CM per hour	Total contribution
Debbie	29150	16.18	471700
Trish	9900	15.45	153000
Sarah	32300	16.01	517180
Mike	10400	6.46	67200
Sewing kit	55760	18.24	1016800
Total	137510		2225880

5. For additional capacity company will pay $8 (direct labor) + $6.46 (contribution per hour for Mike) = $14.46