Question

The Montrose 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 the best 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
Marcy	25,000	$47.00	$4.70	$6.50
Tina	41,000	$35.00	$3.40	$5.00
Cari	39,000	$32.00	$6.50	$12.50
Lenny	45,000	$32.00	$5.10	$11.00
Sewing kit	450,000	$31.00	$3.20	$4.90

The following additional information is available:

a.	The company’s plant has a capacity of 154,000 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 $22 per hour is expected to remain unchanged during the coming year.
c.	Fixed costs total $346,000 per year. Variable overhead costs are $3 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. (Round your final answers to 2 decimal places.)

       

2.	Calculate 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.)

     

4.	What is the highest price, in terms of a rate per hour, that Montrose Toy Company should be willing to pay for additional capacity (that is, for added direct labor time)? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

      

Answer 1

Req 1
				Marcy	Tina	Cari	Lenny	Sewing kit
Direct labour cost				6.50	5.00	12.50	11.00	4.90
Labour rate per hour				22.00	22.00	22.00	22.00	22.00
Labour hours required per unit				0.30	0.23	0.57	0.50	0.22
Selling price per unit				47.00	35.00	32.00	32.00	31.00
Less: Variable ccst per unit
Material				4.70	3.40	6.50	5.10	3.20
Labour				6.50	5.00	13.00	11.00	4.90
Oh @ 3 per hour				0.90	0.69	1.71	1.50	0.66
Contribution margin per unit				34.90	25.91	10.79	14.40	22.24
Labour hours				0.30	0.23	0.57	0.50	0.22
Contribution margin per hour				116.33	112.65	18.93	28.80	101.09
Req 2
				Marcy	Tina	Cari	Lenny	Sewing kit
Direct labour cost				6.50	5.00	12.50	11.00	4.90
Labour rate per hour				22.00	22.00	22.00	22.00	22.00
Labour hours required per unit				0.30	0.23	0.57	0.50	0.22
Maximum demand				25000.00	41000.00	39000.00	45000.00	450000.00
Total labour hours required				7500.00	9430.00	22230.00	22500.00	99000.00
Total labour horus required				160660.00	hourss
Req 3:
Total labour required			160660
Less: Available hours			154000
Shortage of hours			6660
(To be adjusted in Cari as it has lowest contribution margin per hour)
Now, additional houurs available (it can be utilized in Cari only)
Therefore, management is willing to pay aditional rate per hour which the firmis earning from Cari
Therefore, maximum price the firm is ready to pay is:
Existing rate per hour				22
Add: Contribution per hour earned				18.93
Maximum price paid by management				38.93