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 62,000 $ 20.50 $ 5.50 $ 3.60 Trish 54,000 $ 7.00 $ 2.30 $ 1.32 Sarah 47,000 $ 34.00 $ 8.24 $ 7.20 Mike 56,000 $ 15.00 $ 3.20 $ 4.80 Sewing kit 337,000 $ 9.20 $ 4.40 $ 0.72 The following additional information is available: The company’s plant has a capacity of 84,160 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 $12 per hour is expected to remain unchanged during the coming year. Fixed manufacturing costs total $640,000 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 84,160 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

Calculation of direct labor hours per unit = Direct labor cost per unit/Rate per hour
	Direct labor Cost	Rate per hour	Direct Labor hours per unit
Debbie	3.6	12	0.3
Trish	1.32	12	0.11
Sarah	7.2	12	0.6
Mike	4.8	12	0.4
Sewing Kit	0.72	12	0.06
Calculation of variable overhead cost per unit
Variable overhead cost per unit = Labor hours per unit*Variable overhead cost per unit
	Direct Labor hours per unit	Rate per hour	Variable overhead cost per unit
Debbie	0.3	3	0.9
Trish	0.11	3	0.33
Sarah	0.6	3	1.8
Mike	0.4	3	1.2
Sewing Kit	0.06	3	0.18
	Debbie	Trish	Sarah	Mike	Sewing kit
Selling price per unit	20.5	7	34	15	9.2
Direct Material	5.5	2.3	8.24	3.2	4.4
Direct Labor	3.6	1.32	7.2	4.8	0.72
Variable overhead	0.9	0.33	1.8	1.2	0.18
Contribution Margin per Unit (A)	10.5	3.05	16.76	5.8	3.9
Direct Labor hours per unit (B)	0.3	0.11	0.6	0.4	0.06
Contribution margin per direct labor hour(A/B)	35	27.7272727	27.93333333	14.5	65
4.Labor hours will be allocated on the basis of maximum contribution margin per hour
Product	Units	Labor hours per unit	Total Labor hours	Contribution Margin
Debbie	62,000	0.3	18,600	651,000
Trish	54,000	0.11	5,940	164,700
Sarah	47,000	0.6	28,200	787,720
Mike	28,000	0.4	11,200	162,400
Sewing Kit	337,000	0.06	20,220	1,314,300
		Total	84,160	3,080,120
5.highest direct labor rate per hour = Cost + Contribution margin per hour
=$12+14.5
26.5
Since the additional hours will be used to produce Mike