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 68,000 $ 31.00 $ 4.50 $ 4.20 Trish 60,000 $ 5.00 $ 1.40 $ 0.77 Sarah 53,000 $ 44.50 $ 9.14 $ 6.30 Mike 34,000 $ 17.00 $ 3.80 $ 4.90 Sewing kit 343,000 $ 9.80 $ 5.00 $ 0.42 The following additional information is available: The company’s plant has a capacity of 127,580 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 $7 per hour is expected to remain unchanged during the coming year. Fixed manufacturing costs total $565,000 per year. Variable overhead costs are $5 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 127,580 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.Direct Labour hours used to manufacture one unit:

	Debbie	Trish	Sarah	Mike	Sewing Kit
Direct Labour Cost Per unit (A)	4.20	0.77	6.30	4.90	0.42
Direct Labor Rate (B)	7	7	7	7	7
Labor Hours required per unit (A/B)	0.6	0.11	0.9	0.7	0.06

2. Variable Cost per Unit:

	Debbie	Trish	Sarah	Mike	Sewing Kit
Direct Material Cost per Unit	4.50	1.40	9.14	3.80	5.00
Direct Labour Cost Per unit	4.20	0.77	6.30	4.90	0.42
Total Variable Cost per Unit	8.70	2.17	15.44	8.7	5.42

3..Calculation of contribution margin per hour from all the products:

	Debbie	Trish	Sarah	Mike	Sewing Kit
Selling Price per Unit	31	5	44.50	17	9.80
Total Variable Cost per Unit	8.70	2.17	15.44	8.7	5.42
Contribution Margin per Unit (A)	22.3	2.83	29.06	8.3	4.38
Labor Hours required per unit (B)	0.6	0.11	0.9	0.7	0.06
Contribution Margin per Hour (A/B)	37.17	25.73	32.29	11.86	73
Order of preference	II	IV	III	V	I

Optimal Production will be as follows:

Product	Units	Hours per Unit	Total Hours
Debbie	68,000	0.6	40,800
Trish	60,000	0.11	6,600
Sarah	53,000	0.9	47,700
Mike	17,000	0.7	11,900
Sewing Kit	343,000	0.06	20,580
Total			127,580

           

Highest contribution margin will be:

Product	Units	Contribution Margin per Unit	Total Contribution Margin
Debbie	68,000	22.3	1,516,400
Trish	60,000	2.83	169,800
Sarah	53,000	29.06	1,540,180
Mike	17,000	8.3	141,100
Sewing Kit	343,000	4.38	1,502,340
Total			4,869,820

5. highest direct labor rate per hour that Walton Toy Company would be willing to pay for additional capacity = Cost + Contribution margin per hour of Mike (since all other products have been produced at the maximum demand)

= $7+$11.86 = $18.86 per hour