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	65,000	$	28.00	$	4.20	$	4.05
Trish	57,000	$	6.00	$	1.10	$	1.26
Sarah	50,000	$	35.00	$	8.69	$	6.75
Mike	40,000	$	14.00	$	3.50	$	4.95
Sewing kit	340,000	$	9.50	$	4.70	$	0.81

The following additional information is available:  

1. The company’s plant has a capacity of 116,330 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 $9 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $535,000 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 116,330 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				4.05	1.26	6.75	4.95	0.81
direct labor rate per hour				9	9	9	9	9
direct labor hrs per unit				0.45	0.14	0.75	0.55	0.09
2)	variable overhead cost incurred
				Debbie	Trish	Sarah	Mike	Sewing kit
variable overhead cost per hour				2	2	2	2	2
direct labor hours per unit				0.45	0.14	0.75	0.55	0.09
variabe overhead cost incurred				0.9	0.28	1.5	1.1	0.18
3)	total contribution margin
Selling price				28	6	35	14	9.5
less:Variable costs
direct materials				4.2	1.1	8.69	3.5	4.7
direct labor				4.05	1.26	6.75	4.95	0.81
variable overhead				0.9	0.28	1.5	1.1	0.18
total variable costs				9.15	2.64	16.94	9.55	5.69
contribution margin per unit				18.85	3.36	18.06	4.45	3.81
direct labor hours per unit				0.45	0.14	0.75	0.55	0.09
contribution margin per hours				41.89	24.00	24.08	8.09	42.33	answer
Ranking				2	4	3	5	1

4)					Allocated	units	contribut	total
					total	produced	per unit	contribution
	product				hours
	Debbie				29,250	65,000	18.85	1225250
	trish				7,980	57,000	3.36	191520
	Sarah				37,500	50,000	18.06	903000
	mike				11,000	20,000	4.45	89000
	sewing kit				30,600	340,000	3.81	1295400
	total hours required				116,330			3704170	answer
5)
	highest price will be		$9direct labor rate +$8.09 contribution margin per hours
			17.09	answer