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)		82,000		68,400		57,400		65,600		116,800
Price per unit	$	41.00	$	34.00	$	31.00	$	21.00	$	27.00
Variable costs:
Direct materials		4.10		3.30		6.30		4.70		2.90
Direct labour		6.80		4.25		11.90		8.50		3.40

The following additional information is available:

a.	The company’s plant has a capacity of 120,000 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 $17 per hour; this rate is expected to remain unchanged during the coming year.
c.	Fixed manufacturing costs amount to $800,000 per year. Variable overhead costs are $6 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)?

4.	Assume again that the company does not want to reduce sales of any product. Identify ways the company could obtain the additional output. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)
	Adding another shift Contracting out some work to outside suppliers Employing additional labour force Expanding the workforce Eliminating wasted labour time in the production process Utilizing the unutilized capacity Working overtime

     

Answer 1

Answer
1	1. Total direct labour-hours required to produce the units estimated to be sold during the coming year :
		Softy	Friendly	Goody	Besty	Lovey	Total
	(a) Demand (Units)	82000	68400	57400	65600	65600
	(b) Labour Cost (p.u)	6.8	4.25	11.9	8.5	3.4
	(c ) Rate per hour	17	17	17	17	17
	(d) No. of Hours p.u (b/c)	0.4	0.25	0.7	0.5	0.2
	(e )Total Hours Required (d*a)	32800	17100	40180	32800	13120	136000
2	2. Keeping in mind the direct labour-hour capacity, the company’s product mix for the upcoming year should be as follows:
		Softy	Friendly	Goody	Besty	Lovey	Total
	Price p.u	41	34	31	21	27
	Variable costs :
	Direct Materials	4.1	3.3	6.3	4.7	2.9
	Direct Labour	6.8	4.25	11.9	8.5	3.4
	Total Costs	10.9	7.55	18.2	13.2	6.3
	Contribution p.u	30.1	`	12.8	7.8	20.7
	No. of Hours p.u	0.4	0.25	0.7	0.5	0.2
	Contribution per hour	75.25	133.6	26.43	20.2	138.5
	Ranking	3	2	4	5	1
	Total Production as per Ranking	82000	68400	57400	53600	65600	327000
	Labour Hours Utilized	32800	17100	40180	26800	13120	130000
					(balance)
3	Product Besty is produced less than it's Demand. So, the highest price, in terms of a rate per hour, that SCF would be willing to pay for additional capacity will be Contribution per hour of Besty i.e $ 20.20 per Hour.
4	4. The company could obtain the additional output by following ways :
	Contracting out some work to outside suppliers
	Employing additional labour force
	Eliminating wasted labour time in the production process
	Working overtime