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	71,000	$	17.50	$	4.80	$	3.20
Trish	63,000	$	6.00	$	1.70	$	1.60
Sarah	56,000	$	31.50	$	9.59	$	5.60
Mike	47,600	$	13.00	$	4.10	$	4.00
Sewing kit	346,000	$	10.10	$	5.30	$	1.20

The following additional information is available:  

The company’s plant has a capacity of 144,000 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 $8 per hour is expected to remain unchanged during the coming year.

Fixed manufacturing costs total $595,000 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 144,000 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

Solution For Q.1 & Q.2:

	Debbie	Trish	Sarah	Mike	Sewing Kit
Direct Labour Cost (a)	$3.20	$1.60	$5.60	$4.00	$1.20
Labour Cost Per Hour (b)	$8	$8	$8	$8	$8
Solution 1.
Direct Labour Hours Used (c) =(a/b)	0.40	0.20	0.70	0.5	0.15
Variable Overhead Cost Per Hour (d)	$3	$3	$3	$3	$3
Solution 2.
Variable Overhead Cost (e) = ( c*d )	$1.20	$0.60	$2.10	$1.50	$0.45

Solution for Q.3:

Particulars	Debbie	Trish	Sarah	Mike	Sewing Kit
Selling Price Per Unit	$17.5	$6.00	$31.50	$13.00	$10.00
Less: Variable Cost
Direct Material Cost	$4.80	$1.70	$9.59	$4.10	$5.30
Direct Labour Cost	$3.20	$1.60	$5.60	$4.00	$1.20
Variable Overhead Cost	$1.65	$2.25	$2.10	$1.50	$0.45
Contribution Margin (a)	$7.85	$0.45	$14.21	$3.4	$3.05
Direct Labour Hours Used (b)	0.40	0.20	0.70	0.5	0.15
Solution 3.
Contibution Margin Per Direct LAbour Hour ( a/b )	$19.63	$2.25	$20.30	$6.80	$20.33
Ranking	3	5	2	4	1

Solution For Q.4:

	Debbie	Trish	Sarah	Mike	Sewing Kit	Total
Demand Next Year (a)	71,000	63,000	56,000	47,600	3,46,000
Direct Labour Hours Used (b)	0.40	0.20	0.70	0.50	0.15
Total Direct Labour H ours Needed (c) = ( a*b )	28,000	12,600	39,200	23,800	51,900	1,55,500
Ranking	3	5	2	4	1
Direct Labour Hour Used (g)	28,000	1,100	39,200	23,800	51,900	1,44,000
Contribution per direct labor hour (e)	$19.63	$2.25	$20.30	$6.80	$20.33
Solution 4:
Total Contribution (f) = ( c* g )	$5,49,640	$28,350	$7,95,760	$1,61,840	$10,55,127	$25,90,717

Solution for Q.5:

Additional Contribution due to additional capacity = ( 1,55,500 - 1,44,000 ) * $2.25

= 11,500 * $2.25

= $25,875

Highest Direct Labour Rate Per Hour = $8 + $2.25

= $10.25