In: Accounting
The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for the dolls 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 | 63,000 | $21.00 | $5.60 | $4.20 |
Trish | 55,000 | $7.50 | $2.40 | $1.44 |
Sarah | 48,000 | $36.50 | $8.39 | $7.80 |
Mike | 48,000 | $16.00 | $3.30 | $5.40 |
Sewing Kit | 338,000 | $9.30 | $4.50 | $0.84 |
The following additional information is available:
A.The company’s plant has a capacity of 94,310 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.
B. The direct labor rate of $12 per hour is expected to remain unchanged during the coming year.
C. Fixed costs total $650,000 per year. Variable overhead costs are $4 per direct labor-hour.
D. All of the company's nonmanufacturing costs are fixed.
E. The company’s finished goods inventory is negligible and can be ignored.
Required:
1. Determine the contribution margin per direct labor-hour expended on each product. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Product | Contribution Margin Per DLH |
Debbie | ? |
Trish | ? |
Sarah | ? |
Mike | ? |
Sewing Kit | ? |
2. Calculate the the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year. (Do not round intermediate calculations.)
Product | Total Hours |
Debbie | ? |
Trish | ? |
Sarah | ? |
Mike | ? |
Sewing Kit | ? |
Total Hours Required | ? |
3. Based on response to Requirement 1 & 2, how much of 94,310 direct labor hours of capacity will be allocated to Walton Toy Company’s various products?
Product | Hours |
Debbie | ? |
Trish | ? |
Sarah | ? |
Mike | ? |
Sewing Kit | ? |
4. What is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?
5. What is the highest price, in terms of a 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.)
Solution
Walton Toy Company
Product |
selling price per unit |
Direct material cost per unit |
Direct labor cost per unit |
Variable overhead per unit |
Total variable cost per unit |
Contribution margin per unit |
direct labor hours per unit |
contribution per direct labor hour |
|
Debbie |
$21.00 |
$5.60 |
$4.20 |
$1.40 |
$11.20 |
$9.80 |
0.35 hours |
$28 |
|
Trish |
$7.50 |
$2.40 |
$1.44 |
$0.48 |
$4.32 |
$3.18 |
0.12 hours |
$26.50 |
|
Sarah |
$36.50 |
$8.39 |
$7.80 |
$2.60 |
$18.79 |
$17.71 |
0.65 hours |
$27.25 |
|
Mike |
$16.00 |
$3.30 |
$5.40 |
$1.80 |
$10.50 |
$5.50 |
0.45 hours |
$12.23 |
|
Sewing Kit |
$9.30 |
$4.50 |
$0.84 |
$0.28 |
$5.62 |
$3.68 |
0.07 hours |
$52.57 |
Contribution per direct labor hour = contribution per unit/direct labor hours per unit
For instance, contribution per direct labor hour for the product Sarah is arrived at as follows,
Contribution per unit = $17.71; direct labor hours per unit = 0.65 hours
Contribution per direct labor hour = $17.71/0.65 hours =$27.25
Accordingly, the contribution per direct labor hour for each product and respective ranking is as follows,
Product |
Contribution per direct labor hour |
Ranking |
Debbie |
$28 |
II |
Trish |
$26.50 |
IV |
Sarah |
$27.25 |
III |
Mike |
$12.23 |
V |
Sewing Kit |
$52.57 |
I |
1a. Determination of the number of direct labor hours needed to manufacture one unit of each of the five products:
Product |
Direct labor |
Direct labor cost per hour |
direct labor hours per unit |
Variable overhead per unit at $4 per DLH |
|
Debbie |
$4.20 |
$12 |
0.35 |
$1.40 |
|
Trish |
$1.44 |
$12 |
0.12 |
$0.48 |
|
Sarah |
$7.80 |
$12 |
0.65 |
$2.60 |
|
Mike |
$5.40 |
$12 |
0.45 |
$1.80 |
|
Sewing Kit |
$0.84 |
$12 |
0.07 |
$0.28 |
Direct labor hour per unit is calculated as follows,
Total direct labor hour per unit/direct labor hour
Direct labor hour rate = $12 per hour
For instance, direct labor hour for the product Debbie = $4.20/$12 =0.35 hours
1B. determination of the amount of variable overhead cost incurred to manufacture one unit of each of the five products:
Product |
direct labor hours per unit |
Variable overhead per unit at $4 per DLH |
|
Debbie |
0.35 |
$1.40 |
|
Trish |
0.12 |
$0.48 |
|
Sarah |
0.65 |
$2.60 |
|
Mike |
0.45 |
$1.80 |
|
Sewing Kit |
0.07 |
$0.28 |
Product |
Units |
Hours per Unit |
Total Hours |
Debbie |
63,000 |
0.35 |
22,050 |
Trisha |
55,000 |
0.12 |
6,600 |
Sarah |
48,000 |
0.65 |
31,200 |
Mike |
48,000 |
0.45 |
21,600 |
Sewing Kit |
338,000 |
0.07 |
23,660 |
Total |
105,110 |
||
1D. determining the highest total contribution margin if the company makes the optimal use of its constrained (direct labor hours) resource:
Since the product Sewing Kit earns highest contribution per direct labor hour, available direct labor hours are to allotted first for the production of the expected units of Sewing Kit.
Total available direct labor hours at the plant = 94,310 hours
Sewing Kit –
Demand in units for next year338,000
Direct labor hour per unit0.07 hours
Direct labor hours needed to produce 338,000 units = $338,000 x 0.07 hours = 23,660 hours
Remaining direct labor hours at plant = 94,310 – 23,660 = 70,650
The next product with highest ranking is Debbie.
Debbie –
Demand in units for next year 63,000
Direct labor hours per unit0.35
Direct labor hours needed to produce 63,000 units = 63,000 x 0.35 = 20,050 hours
Remaining direct labor hours at plant = 70,650 – 20,050 = 50,600
The next product in terms of highest ranking is Sarah.
Sarah –
Demand in units for next year 48,000
Direct labor hours per unit0.65 hours
Direct labor hours needed to produce 48,000 units = 48,000 x 0.65 = 31,200 hours
Remaining direct labor hours at plant = 94,310 – 23,660 – 31,200 = 19,400 hours
The next product in terms of highest ranking is Trish.
Trish –
Demand in units for next year55,000
Direct labor hours per unit0.12 hours
Direct labor hours needed to produce 55,000 units = 55,000 x 0.12 = 6,600 hours
Remaining direct labor hours at plant = 19,400 – 6,600 = 12,800
The product with the least ranking is Mike.
Mike –
Demand in units for next year 48,000
Direct labor hours per unit0.45
Direct labor hours needed to produce 48,000 units = 48,000 x 0.45 = 21,600 hours
However, the available direct labor hours are 12,800
Hence, the number of units of Mike that can be produced with the available direct labor hours = 12,800 hrs/0.45 hrs
= 28,444 units
Computation of the highest total contribution margin that the company can earn by making the optimal use of constrained resource:
Product |
Units |
Contribution margin per unit |
Contribution margin |
Debbie |
63,000 |
$9.80 |
$617,400 |
Trish |
55,000 |
$3.18 |
$174,900 |
Sarah |
48,000 |
$17.71 |
$850,080 |
Mike |
28,444 |
$5.50 |
$156,442 |
Sewing Kit |
338,000 |
$3.68 |
$1,243,840 |
Total contribution $3,042,662
1E. Determination of the highest direct labor rate per hour that the company would be willing to pay for additional capacity:
Since the additional capacity would be used to produce the product Mike, the highest price the company would be willing to pay is as arrived at as follows,
Total price for additional direct labor hour capacity$12 + 12.23 = $24.23