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	70,000	$	38.00	$	4.70	$	3.50
Trish	62,000	$	4.60	$	1.60	$	1.00
Sarah	55,000	$	31.00	$	9.44	$	6.50
Mike	48,000	$	14.00	$	4.00	$	4.50
Sewing kit	345,000	$	10.00	$	5.20	$	0.50

The following additional information is available:  

The company’s plant has a capacity of 94,500 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 $10 per hour is expected to remain unchanged during the coming year.

Fixed manufacturing costs total $585,000 per year. Variable overhead costs are $3 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 94,500 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)?

	Debbie	Trish	Sarah	Mike	Sewing Kit
Direct labor hours per unit

	Debbie	Trish	Sarah	Mike	Sewing Kit
Variable overhead cost per unit

	Debbie	Trish	Sarah	Mike	Sewing Kit
Contribution Margin per DLH

Highest total contribution margin

Highest direct labor rate per hour

per hour

Answer 1

Req 1
			DEBBIE	TRISH	SARAH	MIKE	SEWING KIT
Direct labour cost			3.5	1	6.5	4.5	0.5
Labour rate per hour			10	10	10	10	10
Labour hour per unit			0.35	0.1	0.65	0.45	0.05
Req 2:
			DEBBIE	TRISH	SARAH	MIKE	SEWING KIT
Direct labour cost			3.5	1	6.5	4.5	0.5
Labour rate per hour			10	10	10	10	10
Labour hour per unit			0.35	0.1	0.65	0.45	0.05
variable OH rate per hour			3	3	3	3	3
Variable OH per unit			1.05	0.3	1.95	1.35	0.15
Req 3:
			DEBBIE	TRISH	SARAH	MIKE	SEWING KIT
Selling price per unit			38	4.6	31	14	10
Less: variable cost per unit
material			4.7	1.6	9.44	4	5.2
Labour			3.5	1	6.5	4.5	0.5
Variable Oh			1.05	0.3	1.95	1.35	0.15
Conttribution margin per unit			28.75	1.7	13.11	4.15	4.15
Labour hour per unit			0.35	0.1	0.65	0.45	0.05
Contribution margin per hour			82.14	17	20.17	9.22	83
Rreq 4:
			DEBBIE	TRISH	SARAH	MIKE	SEWING KIT	TOTAL
Contribution margin per hour			82.14	17	20.17	9.22	83
Ranking based on highest cont.			II	IV	III	V	I
Demand			70000	62000	55000	48000	345000
Hours required per unit			0.35	0.1	0.65	0.45	0.05
Total labour hours			24500	6200	35750	21600	17250	105300
Labour hours available								94500
Labour hours shortage						-10800		10800
(to be adjusted from Mike as low margin product)
Labour hours distributed			24500	6200	35750	10800	17250	94500
Contribution margin per hour			82.14	17	20.17	9.22	83
Total contribution margin earned			2012430	105400	721078	99576	1431750	4370234
Req 5:
Highest labor paid is based on contribution margin per hour earned from product-Mike.
This is because of the reason that only this product is to be produce from additional hours.
Therefore, Highest labour rate paid for additional hours:
Rate already exist:				10
Add: Contribution margin per hour earned				9.22
Highest rate per labouorr hour				19.22