Question

Demand for Stuffin’ Such stuffed animal shells and stuffing/finishing kits manufactured by RoseMarie Limited 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 Labour
Teddy bear		11,500		$	35		$	6.20		$	3.50
Polar bear		7,500		$	37		$	5.00		$	3.00
Husky		8,500		$	30		$	4.20		$	5.00
Tiger		5,500		$	32		$	4.80		$	7.00
Stuffing/finishing kits		19,000		$	17		$	3.20		$	2.00

The following additional information is available:

a.	The company’s plant has a capacity of 17,300 direct labour-hours per year on a single-shift basis. The company’s current employees and equipment can produce all five products.
b.	The direct labour rate of $10.00 per hour is expected to remain unchanged during the coming year.
c.	Fixed costs total $165,000 per year. Variable overhead costs are $2.00 per direct labour-hour.
d.	All of the company’s non-manufacturing costs are fixed.
e.	The company’s finished goods inventory is negligible and can be ignored.

Required:
a.	Determine the contribution margin per direct labour-hour expended on each product (the profitability index). (Do not round intermediate calculations. Round your answers to 2 decimal places.)

      

b.	Prepare a schedule showing the total direct labour-hours that will be required to produce the units estimated to be sold during the coming year.

      

d.	What is the highest price, in terms of a rate per hour, that Stuffin’ Such should be willing to pay for additional capacity (that is, for added direct labour time)? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

Answer a.
	Teddy Bear	Polar Bear	Husky	Tiger	Stufing / Finishing Kits
Selling Price	35.00	37.00	30.00	32.00	17.00
Variable Costs
Direct materials	6.20	5.00	4.20	4.80	3.20
Direct Labor	3.50	3.00	5.00	7.00	2.00
Variable Overhead - $2 X DLH per Unit	0.70	0.60	1.00	1.40	0.40
Total Variable Cost	10.40	8.60	10.20	13.20	5.60
Contribution Margin	24.60	28.40	19.80	18.80	11.40
Direct Labour Hour per Unit (Direct Labor / $10)	0.35	0.30	0.50	0.70	0.20
Contribution Margin per Direct Labor Hour	70.29	94.67	39.60	26.86	57.00
Ranking	II	I	IV	V	III
Answer b.
	Direct Lab. Hr Per Unit	Demand in Units	Direct Labor Hours
Teddy Bear	0.35	11,500	4,025
Polar Bear	0.30	7,500	2,250
Husky	0.50	8,500	4,250
Tiger	0.70	5,500	3,850
Stufing / Finishing Kits	0.20	19,000	3,800
Total Direct Labor Hours Required			18,175
Answer d.
Calculation of No of Units Produced by available Labor Hours:
	Quantity	Labor Hours per unit	Total Direct Labor	Balance of Direct Labor
Total Labor hours available				17,300
Polar Bear Produced	7,500	0.30	2,250	15,050
Teddy Bear Produced	11,500	0.35	4,025	11,025
Stuffing / Finishing Kit Produced	19,000	0.20	3,800	7,225
Husky Produced	8,500	0.50	4,250	2,975
Tiger Produced	4,250	0.70	2,975	-
Additional Labor Hours Required
For Tiger - 1,250 Units X 0.70 DLH	875
Calculation of Maximum Price to be Paid for 875 DLH
Normal Rate - $10 X 875 Hrs	8,750.00
Contribution on Sale of 1,250 Units - Tiger - $18.80 X 1,250 Units	23,500.00
Total Amount Can be Paid for 875 Hours	32,250.00
Cost per Hour	36.86