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 50,000 $ 16.70 $ 4.30 $ 6.40 Trish 42,000 $ 7.50 $ 1.10 $ 4.00 Sarah 35,000 $ 26.60 $ 6.44 $ 11.20 Mike 40,000 $ 14.00 $ 2.00 $ 8.00 Sewing kit 325,000 $ 9.60 $ 3.20 $ 3.20 The following additional information is available: The company’s plant has a capacity of 130,000 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 $16 per hour is expected to remain unchanged during the coming year. Fixed manufacturing costs total $520,000 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 130,000 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

Answer 1 & 2

Product	Demand (Units)	Direct Labour Cost	Direct Labour Hour	Variable Overhead
		(A)	(B) = [(A)/16]	C = B * 2
Debbie	50,000	6.4	0.4	0.8
Trish	42,000	4	0.25	0.5
Sarah	35,000	11.2	0.7	1.4
Mike	40,000	8	0.5	1
Sewing Kit	3,25,000	3.2	0.2	0.4

Answer 3 & 4

Product	Demand (Units)	Selling Price	Direct Material	Direct Labour	Variable Overhead	Contribution Margin (CM)	CM per Direct Labour hr	Ranking of Production	Labour Hours utilised	Units Produced	Contibution Earned
Debbie	50,000	16.70	4.30	6.40	0.80	5.20	13.00	II	20,000	50,000	2,60,000
Trish	42,000	7.50	1.10	4.00	0.50	1.90	7.60	IV	10,500	42,000	79,800
Sarah	35,000	26.60	6.44	11.20	1.40	7.56	10.80	III	24,500	35,000	2,64,600
Mike	40,000	14.00	2.00	8.00	1.00	3.00	6.00	V	10,000	20,000	60,000
Sewing Kit	3,25,000	9.60	3.20	3.20	0.40	2.80	14.00	I	65,000	3,25,000	9,10,000
									Total		15,74,400

Answer 5

Out of total available 130,000 Direct Labour hours, demand for all product is satisfied except for product Mike.

For Product Mike, only 20,000 units were produced while its demand is 40,000 units. The remaining demand can be met by utilising additional capacity.

Selling Price of Mike is $14. After deducting material cost of $2 & Variable Overhead of $1, its margin is $11.

$11 is the maximum labour cost that can be incurred for product Mike.

One Mike takes 0.50 Direct Labour hours for production. Thus highest direct labour rate per hour that can be paid for additional capacity is $ 22 [$11/0.50]