Question

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	58,000	$26.00	$5.10	$2.10
Trish	50,000	$ 7.50	$1.90	$0.78
Sarah	43,000	$41.50	$7.64	$3.90
Mike	48,000	$11.00	$2.80	$2.70
Sewing kit	333,000	$ 8.80	$4.00	$0.48

The following additional information is available:  

1. The company’s plant has a capacity of 92,190 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 $6 per hour is expected to remain unchanged during the coming year.
3. Fixed costs total $600,000 per year. Variable overhead costs are $3 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. Determine the contribution margin per direct labor-hour expended on each product. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

  

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.)

  

3. Based on response to Requirement 1 & 2, how much of 92,190 direct labor hours of capacity will be allocated to Walton Toy Company’s various products?

  

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.)

   

Answer 1

Calculation of direct labor hours per unit

= direct labor cost/rate per hour

Debbie = 2.1/6 = 0.35

Trish = 0.78/6 = 0.13

Sarah = 3.90/6 = 0.65

Mike = 2.70/6 = 0.45

Sewing machine =0.48/6 = 0.08

Contribution margin per hour = (selling price per unit - direct material cost - direct labor cost - variable overhead cost)/number of labor hours per unit

Debbie =(26-5.1-2.1-0.35*3)/0.35 =$50.71

Trish =(7.5-1.9-0.78-0.13*3)/0.13 =$34.08

Sarah =(41.5-7.64-3.90-0.65*3)/0.65 =$43.09

Mike =(11-2.80-2.70-0.45*3)/0.45 =$9.22

Sewing machine =(8.8-4-0.48-0.08*3)/0.08 =$51

2.total labor hours required = 58,000*0.35+50,000*0.13+43000*0.65 +48,000*0.45 + 333,000*0.08

= 102,990 hours

3.Capacity should be used in the priority of contribution margin per labor hour

I.e. debbie =20,300 hours

Trish = 6,500 hours

Sarah = 27,950 hours

Mike = 10,800 hours

Sewing machine = 26,640 hours

4.highest contribution margin

= 58,000*17.75 +50,000*4.43 + 43,000*28.01 + 24,000*4.15+ 333,000*4.08

=$3,913,670

5.maximum price = current price + contribution margin per hour

= 6+9.22

=$15.22

Since additional time will be used to produce Mike