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	59,000	$	30.00	$	5.20	$	2.10
Trish	51,000	$	7.00	$	2.00	$	0.70
Sarah	44,000	$	42.00	$	7.79	$	4.20
Mike	54,500	$	12.00	$	2.90	$	2.80
Sewing kit	334,000	$	8.90	$	4.10	$	0.35

The following additional information is available:  

1. The company’s plant has a capacity of 76,800 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 $610,000 per year. Variable overhead costs are $4 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 76,800 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				2.1	0.7	4.2	2.8	0.35
direct labor rate per hour				7	7	7	7	7
direct labor hrs per unit				0.3	0.1	0.6	0.4	0.05
2)	variable overhead cost incurred
				Debbie	Trish	Sarah	Mike	Sewing kit
variable overhead cost per hour				4	4	4	4	4
direct labor hours per unit				0.3	0.1	0.6	0.4	0.05
variabe overhead cost incurred				1.2	0.4	2.4	1.6	0.2
3)	total contribution margin
Selling price				30	7	42	12	8.9
less:Variable costs
direct materials				5.2	2	7.79	2.9	4.1
direct labor				2.1	0.7	4.2	2.8	0.35
variable overhead				1.2	0.4	2.4	1.6	0.2
total variable costs				8.5	3.1	14.39	7.3	4.65
contribution margin per unit				21.5	3.9	27.61	4.7	4.25
direct labor hours per unit				0.3	0.1	0.6	0.4	0.05
contribution margin per hours				71.67	39.00	46.02	11.75	85.00	answer
Ranking				2	4	3	5	1

4)			DLH per	estimated	total
	product		unit	sale units	hours
	Debbie		0.3	59,000	17700
	trish		0.1	51,000	5100
	Sarah		0.6	44,000	26400
	mike		0.4	27,250	10,900
	sewing kit		0.05	334,000	16700
	total hours required				76,800
					Allocated	units	contribut	total
					total	produced	per unit	contribution
	product				hours
	Debbie				17,700	59,000	21.5	1268500
	trish				5,100	51,000	3.9	198900
	Sarah				26,400	44,000	27.61	1214840
	mike				10,900	27,250	4.7	128075
	sewing kit				16,700	334,000	4.25	1419500
	total hours required				76,800			4229815	answer
5)
	highest price will be		$7direct labor rate +$11.75 contribution margin per hours
			18.75	answer