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	69,000	$	41.00	$	4.60	$	4.00
Trish	61,000	$	4.50	$	1.50	$	1.00
Sarah	54,000	$	30.50	$	9.29	$	7.00
Mike	46,800	$	15.00	$	3.90	$	5.00
Sewing kit	344,000	$	9.90	$	5.10	$	0.50

The following additional information is available:  

The company’s plant has a capacity of 100,400 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 $10 per hour is expected to remain unchanged during the coming year.

Fixed manufacturing costs total $575,000 per year. Variable overhead costs are $2 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 100,400 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)?

1... How many direct labor hours are used to manufacture one unit of each of the company’s five products? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Debbie Trish Sarah Mike Sewing Kit Direct labor hours per unit

2... How much variable overhead cost is incurred to manufacture one unit of each of the company’s five products? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Debbie Trish Sarah Mike Sewing Kit Variable overhead per unit

3... What is the contribution margin per direct labor-hour for each of the company’s five products? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Debbie Trish Sarah Mike Sewing Kit Contribution Margin per DLH

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? (Do not round intermediate calculations. Round your final answer to a whole dollar amount.)

	Highest total contribution margin

5... Assuming that the company has made optimal use of its 100,400 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)? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Highest direct labor rate per hour per hour

Answer 1

Solution:

Part 1 – Calculation of Direct labor hour per unit

	Debbie	Trish	Sarah	Mike	Sewing Kit
Direct Labor Cost per unit (A)	$4.00	$1.00	$7.00	$5.00	$0.50
Direct Labor Rate Per hour (B)	$10.00	$10.00	$10.00	$10.00	$10.00
Direct Labor Hours Per Unit (A/B)	0.40	0.10	0.70	0.50	0.05

Part 2 – Variable Overhead Per Unit

	Debbie	Trish	Sarah	Mike	Sewing Kit
Direct Labor Hours Per Unit (As calculated in Part 1) (A)	0.40	0.10	0.70	0.50	0.05
Variable Overhead Cost per direct labor hour (B)	$2.00	$2.00	$2.00	$2.00	$2.00
Variable Overhead Per Unit (A*B)	$0.80	$0.20	$1.40	$1.00	$0.10

Part 3 --- Contribution Margin Per Direct Labor Hour

	Debbie	Trish	Sarah	Mike	Sewing Kit
Selling Price Per Unit	$41.00	$4.50	$30.50	$15.00	$9.90
Variable Cost Per Unit
Direct materials cost per unit	$4.60	$1.50	$9.29	$3.90	$5.10
Direct labor cost per unit	$4.00	$1.00	$7.00	$5.00	$0.50
Variable Overhead Per Unit (refer part 2)	$0.80	$0.20	$1.40	$1.00	$0.10
Total Variable Cost per unit	$9.40	$2.70	$17.69	$9.90	$5.70
Contribution Margin Per Unit (Selling Price - Variable Cost)	$31.60	$1.80	$12.81	$5.10	$4.20
Required Direct Labor Hours per unit (refer part 1)	0.40	0.10	0.70	0.50	0.05
Contribution Margin per direct labor hour (CM per Unit / Required DLH per unit)	$79.00	$18.00	$18.30	$10.20	$84.00

Part 4 –

We need to given ranking based on the constraint resources. Here the constraint resource is Direct Labor Hour so we have already calculate the contribution margin per direct labor hour. The highest CM Ratio per constraint should be make first and then second highest and so on..

So, the ranking is as follows:

Rank 1 = Sewing Kit

Rank 2 = Debbie

Rank 3 = Sarah

Rank 4 = Trish

Rank 5 = Mike

Optimal Production Mix

	Debbie	Trish	Sarah	Mike	Sewing Kit	Total DLHs
Required Direct labor hours per unit	0.40	0.10	0.70	0.50	0.05
Demand Next Year in Units	69000	61000	54000	46800	344000
Total Direct labor hours needed	27600	6100	37800	23400	17200	112100
The maximum units can be produced using Ranking and Constraint Resource	69000	61000	54000	23400	344000
Required Direct labor hours per unit	0.40	0.10	0.70	0.50	0.05
Direct Labor Hours allocation based on ranking	27600	6100	37800	11700	17200	100400

Highest Contribution Margin by using optimal use of constrained resources

	Debbie	Trish	Sarah	Mike	Sewing Kit	Total
Optimal Production Mix Units	69000	61000	54000	23400	344000
CM Per Unit (Refer Part 3)	$31.60	$1.80	$12.81	$5.10	$4.20
Total Contribution Margin	$2,180,400	$109,800	$691,740	$119,340	$1,444,800	$4,546,080

So, the Highest Contribution Margin = $4,546,080

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts