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:  

1. 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.

2. The direct labor rate of $7 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $565,000 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 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

Answer 1 & 2
Product	Demand	Direct Labour Cost ( in $)	Direct Labour Hour	Variable Overhead ($)
	(Units)
		(A)	(B) = [(A)/7]	C = B * $5
Debbie	68000	$4.20	0.6	$3.00
Trish	60000	$0.77	0.11	$0.55
Sarah	53000	$6.30	0.9	$4.50
Mike	34000	$4.90	0.7	$3.50
Sewing Kit	343000	$0.42	0.06	$0.30

Answer 3 & 4
Product	Demand	Selling Price	Direct Material	Direct Labour	Variable Overhead	Contribution Margin (CM)	Direct Labour Hour	CM per Direct Labour hr	Ranking of Production	Labour Hours utilised	Units Produced	Contibution Earned
	(Units)
Debbie	68000	$31.00	$4.50	$4.20	$3.00	$19.30	0.6	$32.17	II	40800	68000	$13,12,400.00
Trish	60000	$5.00	$1.40	$0.77	$0.55	$2.28	0.11	$20.73	IV	6600	60000	$1,36,800.00
Sarah	53000	$44.50	$9.14	$6.30	$4.50	$24.56	0.9	$27.29	III	47700	53000	$13,01,680.00
Mike	34000	$17.00	$3.80	$4.90	$3.50	$4.80	0.7	$6.86	V	10,000	34000	$1,63,200.00
Sewing Kit	343000	$9.80	$5.00	$0.42	$0.30	$4.08	0.06	$68.00	I	20580	343000	$13,99,440.00
									Total	115680		$43,13,520.00