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	63,000	$	21.00	$	5.60	$	4.20
Trish	55,000	$	7.50	$	2.40	$	1.44
Sarah	48,000	$	36.50	$	8.39	$	7.80
Mike	48,000	$	16.00	$	3.30	$	5.40
Sewing kit	338,000	$	9.30	$	4.50	$	0.84

The following additional information is available:  

1. The company’s plant has a capacity of 94,310 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 $12 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $650,000 per year. Variable overhead costs are $4 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. 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 94,310 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

1		Debbie	Trish	Sarah	Mike	Sewing Kit
	Direct labor cost $	4.20	1.44	7.80	5.40	0.84
	÷ Direct labor rate per hour $	12	12	12	12	12
	Direct labor hours per unit	0.35	0.12	0.65	0.45	0.07
2		Debbie	Trish	Sarah	Mike	Sewing Kit
	Direct labor hours per unit	0.35	0.12	0.65	0.45	0.07
	x Variable overhead cost per direct labor hour $	4	4	4	4	4
	Variable overhead cost per unit $	1.40	0.48	2.60	1.80	0.28
3		Debbie	Trish	Sarah	Mike	Sewing Kit
	Selling price $	21.00	7.50	36.50	16.00	9.30
	Less: Variable costs
	Direct materials	5.60	2.40	8.39	3.30	4.50
	Direct labor	4.20	1.44	7.80	5.40	0.84
	Variable overheads	1.40	0.48	2.60	1.80	0.28
	Total variable costs	11.20	4.32	18.79	10.50	5.62
	Contribution margin per unit $	9.80	3.18	17.71	5.50	3.68
	÷ Direct labor hours per unit	0.35	0.12	0.65	0.45	0.07
	Contribution margin per direct labor hour $	28.00	26.50	27.25	12.22	52.57
4		Debbie	Trish	Sarah	Mike	Sewing Kit	Total
	Contribution margin per direct labor hour $	28.00	26.50	27.25	12.22	52.57
	Ranking	II	IV	III	V	I
	Demand (units)	63000	55000	48000	48000	338000
	x Direct labor hours required per unit	0.35	0.12	0.65	0.45	0.07
	Total direct labor hours	22050	6600	31200	10800	23660	94310
					(Remaining)
	Number of units	63000	55000	48000	24000	338000
					(10800/0.45)
	Contribution margin per unit $	9.80	3.18	17.71	5.50	3.68
	Total contribution margin $	617400	174900	850080	132000	1243840	3018220

The highest total contribution margin with optimal use of constrained resource is $3018220.

5. The highest direct labor rate per hour that Walton Company would be willing to pay for the additional direct labor time is $12.22 which is the contribution margin per direct labor hour for Mike for which the additional direct hours will be used.