Question

Problem 12-25 Volume Trade-Off Decisions [LO12-5, LO12-6]

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	56,000	$	28.50	$	4.90	$	4.40
Trish	48,000	$	6.50	$	1.70	$	1.28
Sarah	41,000	$	40.50	$	7.34	$	6.80
Mike	32,000	$	16.00	$	2.60	$	5.20
Sewing kit	331,000	$	8.60	$	3.80	$	0.88

The following additional information is available:  

1. The company’s plant has a capacity of 120,140 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 $8 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $580,000 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 120,140 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

Solution:

1)

	Debbie	Trish	Sarah	Mike	Sewing kit
Direct labor cost per unit (a)	4.4	1.28	6.80	5.20	0.88
Direct labor cost per hour (b)	8	8	8	8	8
Direct labor hours per unit (a/b)	0.55	0.16	0.85	0.65	0.11

2)

Variable overhead cost incurred:

	Debbie	Trish	Sarah	Mike	Sewing kit
Variable overhead cost per unit (a)	5	5	5	5	5
Direct labor hours per unit (b)	0.55	0.16	0.85	0.65	0.11
Variable overhead cost incurred (a*b)	2.75	0.8	4.25	3.25	0.55

3)

Total contribution margin

	Debbie	Trish	Sarah	Mike	Sewing kit
Selling price (a)	28.5	6.50	40.50	16	8.6
Less: Variable costs
Direct materials	4.90	1.70	7.34	2.60	3.80
Direct labor	4.4	1.28	6.80	5.20	0.88
Variable overhead	2.75	0.8	4.25	3.25	0.55
Total variable costs (b)	12.05	3.78	18.39	11.05	5.23
Contribution margin per unit ( c =a- b)	16.45	2.72	22.11	4.95	3.37
direct labor hours per unit (d)	0.55	0.16	0.85	0.65	0.11
Contribution margin per hour (e = c/d)	29.90	17.00	26.01	7.61	30.63
Ranking	2	4	3	5	1

4)

	DLH per unit (a)	Estimated sales units (b)	Total hours (a*b)
Product:
Debbie	0.55	56,000	30,800
Trish	0.16	48,000	7,680
Sarah	0.85	41,000	34,850
Mike	0.65	32,000	20,800
Sewing Kit	0.11	331,000	36,410
Total hours required			130,540

	Estimated sales units (b)	Contribution per unit	Total contribution
Product:
Debbie	56,000	16.45	921,200
Trish	48,000	2.72	130,560
Sarah	41,000	2.11	86,510
Mike	32,000	4.95	158,400
Sewing Kit	331,000	3.37	1,115,470
Total hours required			2,412,140

5)

Highest price will be = direct labor rate + contribution margin per hours

=$8 +$7.61

=$15.61

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