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	56,000	$	28.50	$	4.90	$	4.40
Trish	48,000	$	6.50	$	1.70	$	1.28
Sarah	41,000	$	40.50	$	7.34	$	6.80
Mike	32,000	$	16.00	$	2.60	$	5.20
Sewing kit	331,000	$	8.60	$	3.80	$	0.88

The following additional information is available:  

1. The company’s plant has a capacity of 120,140 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 $580,000 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 120,140 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

Walton Toy Company
1. Calculation of Contribution Margin per DLH
	Debbie	Trish	Sarah	Mike	Sewing Kit
DL cost p.u	4.4	1.28	6.8	5.2	0.88
DL Hrs. p.u ( DL cost p.u / 8 )	0.55	0.16	0.85	0.65	0.11	Answer 1
S.P	28.5	6.5	40.5	16	8.6
VC
DM	4.9	1.7	7.34	2.6	3.8
DL	4.4	1.28	6.8	5.2	0.88
VOH ( DL Hrs. p.u * 3 )	2.75	0.8	4.25	3.25	0.55	Answer 2
Total VC	12.05	3.78	18.39	11.05	5.23
Contribution Margin	16.45	2.72	22.11	4.95	3.37
Contribution Margin per DLH	29.90909091	17	26.01176471	7.615384615	30.63636364	Answer 3
2. Calculation of Total Labour hours required
Product	DLH p.u	Demand	Total Hrs. needed
Debbie	0.55	56000	30800
Trish	0.16	48000	7680
Sarah	0.85	41000	34850
Mike	0.65	32000	20800
Sewing Kit	0.11	331000	36410
			130540
3. Allocation of Total Labour hours
Product	DLH p.u	Demand	Total Hrs. needed
Debbie (II)	0.55	56000	30800
Trish (IV)	0.16	48000	7680
Sarah(III)	0.85	41000	34850
Mike(V)	0.65	16000	10400
Sewing Kit (I)	0.11	331000	36410
			120140
4. Calculation of Contribution Margin
Product	CM p.u	Units sold	Total contribution
Debbie	16.45	56000	921200
Trish	2.72	48000	130560
Sarah	22.11	41000	906510
Mike	4.95	16000	79200
Sewing Kit	3.37	331000	1115470
			3152940	Answer 4
5. Due to the constarined resource that is, direct labour hours, we have to sacrifice
the production of Mike by 16000 units. Mike was giving contribution margin of 7.62 per hour , so the highest
price that Walton toy company will be willing to pay for additional capacity is $ 7.62 + 8 = 15.62 per hour.
Answer 5 - $ 15.62