Question

Soft and Cuddly Friends (SCF) produces soft dolls. Demand for the dolls is increasing, and management wants you to identify an economical sales and production mix for the coming year. The following information is available:

		Softy		Friendly		Goody		Besty		Lovey
Demand (units)		72,000		60,400		50,400		57,600		102,800
Price per unit	$	27.00	$	12.00	$	43.00	$	21.00	$	17.00
Variable costs:
Direct materials		11.75		3.75		17.10		6.00		9.00
Direct labour		5.60		3.50		9.80		7.00		2.80

The following additional information is available:

a.	The company’s plant has a capacity of 110,000 direct labour-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.
b.	The direct labour rate is $14 per hour; this rate is expected to remain unchanged during the coming year.
c.	Fixed manufacturing costs amount to $700,000 per year. Variable overhead costs are $5 per direct labour-hour.
d.	All of the company’s sales and administrative costs are fixed.

Required:

1.	How many total direct labour-hours will be required to produce the units estimated to be sold during the coming year? Show your computations. (Round your answers to 2 decimal places.)

2.	Keeping in mind the direct labour-hour capacity, what should be the company’s product mix for the upcoming year? Prepare a schedule in support of your recommendation. (Round "Per Unit" to 2 decimal places.)

3.	What is the highest price, in terms of a rate per hour, that SCF would be willing to pay for additional capacity (i.e., for added direct labour time)?

Answer 1

1		Softy	Friendly	Goody	Besty	Lovey
	Direct Labor Cost per unit (A)	5.6	3.5	9.8	7	2.8
	Direct Labor Cost per hour (B)	14	14	14	14	14
	Direct labor Hour per unit (A/B)	0.4	0.25	0.7	0.5	0.2
2		Softy	Friendly	Goody	Besty	Lovey
	Price per unit (A)	27	12	43	21	17
	Direct material Cost per unit (B)	11.75	3.75	17.1	6	9
	Direct labor Cost (C	5.6	3.5	9.8	7	2.8
	Variable Cost (D) ($5*Direct labor per unit)	2	1.25	3.5	2.5	1
	Contrbution Margin per unit E=(A-B-C-D)	7.65	3.5	12.6	5.5	4.2
	Direct Labor hour required per unit (F)	0.4	0.25	0.7	0.5	0.2
	Contrbution margin per direct labor hour (E/F)	19.125	14	18	11	21
	Preferrence	II	Iv	III	V	I
	Product	Direct Labor Hours per unit		Estimated Sales Unit	Total Hours
	Softy	0.4	hours	72000	28800
	Friendly	0.25	hours	60400	15100
	Goody	0.7	hours	50400	35280
	Besty	0.5	hours	20520	10260
	Lovey	0.2	hours	102800	20560
					110000
	maximum Can pay per direct labor hour	14+14		$28.00