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	65,000	$	28.00	$	4.20	$	4.05
Trish	57,000	$	6.00	$	1.10	$	1.26
Sarah	50,000	$	35.00	$	8.69	$	6.75
Mike	40,000	$	14.00	$	3.50	$	4.95
Sewing kit	340,000	$	9.50	$	4.70	$	0.81

The following additional information is available:  

The company’s plant has a capacity of 116,330 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 $9 per hour is expected to remain unchanged during the coming year.

Fixed manufacturing costs total $535,000 per year. Variable overhead costs are $2 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 116,330 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

			A	B	C=A/B
	1	Product	Direct labor cost per unit	Direct Labor Rate($/Hour)	Direct Labour hour per unit
		Debbie	$4.05	9	0.45
		Trish	$1.26	9	0.14
		Sarah	$6.75	9	0.75
		Mike	$4.95	9	0.55
		Sewing kit	$0.81	9	0.09
			A	B	C=A*B
	2	Product	Direct Labor hour per unit	Variable Overhead Rate($/hour)	Variable Overhead Cost per unit
		Debbie	0.45	$2	$                0.90
		Trish	0.14	$2	$                0.28
		Sarah	0.75	$2	$                1.50
		Mike	0.55	$2	$                1.10
		Sewing kit	0.09	$2	$                0.18
			A	B	C	D	E=B+C+D	F=A-E	G	H=F/G
	3	Product	Sales price Per unit	Direct Material	Direct Labor	Variable Overhead	Total Variable cost per unit	Unit Contribution margin	Direct labor hour	Contribution margin per direct labor hour
		Debbie	$28.00	$4.20	$4.05	$       0.90	$9.15	$18.85	0.45	$                     41.89
		Trish	$6.00	$1.10	$1.26	$       0.28	$2.64	$3.36	0.14	$                     24.00
		Sarah	$35.00	$8.69	$6.75	$       1.50	$16.94	$18.06	0.75	$                     24.08
		Mike	$14.00	$3.50	$4.95	$       1.10	$9.55	$4.45	0.55	$                        8.09
		Sewing kit	$9.50	$4.70	$0.81	$       0.18	$5.69	$3.81	0.09	$                     42.33
		Total Direct labor hours available	116,330
		Maximum Contribution margin per hour	SEWING KIT
		ALLOCATE MAXIMUM POSSIBLE TO SEWING KIT
		Demand of Sewing Kit	340000	unit
		Direct labor hour per unit	0.09
		Hours allocated to Sewing kit	30,600	(340000*0.09)
		Contribution Margin	$        1,295,400	(340000*$3.81)
	A	Balance Hours available	85,730	(116330-30600)
	B	Demand of Debbie	65000
	C	Direct labor hour per unit	0.45
	D=B*C	Hours allocated to Debbie	29,250
	E	Contribution Margin	$        1,225,250	(65000*$18.85)
	F=A-D	Balance Hours available	56,480
	G	Demand of Sarah	50000
	H	Direct labor hour per unit	0.75
	I=G*H	Hours allocated to Sarah	37500
	J	Contribution Margin	$903,000	(50000*$18.06)
	K=F-I	Balance Hours available	18,980
	L	Demand of Trish	57000
	M	Direct labor hour per unit	0.14
	N=L*M	Hours allocated to Trish	7980
	P	Contribution Margin	$191,520	(57000*$3.36)
	Q=K-N	Balance Hours available	11,000
		Direct labor hour per unit of Mike	0.55
		Quantity to be produced for Mike	20,000	(11000/0.55)
		Contribution Margin	$              89,000	(20000*$4.45)
		Product	Quantity Produced	Contribution Margin	Direct labor hour allocated
		Debbie	65000	$    1,225,250	29,250
		Trish	57000	$191,520	7980
		Sarah	50000	$903,000	37500
		Mike	20,000	$          89,000	11,000
		Sewing kit	340000	$    1,295,400	30,600
			TOTAL	$    3,704,170	116,330.00
		Highest Contribution margin that the company can earn	$        3,704,170
			Contribution Margin per direct labor hour	$             31.84	(3704170/116330)
		Highest Direct labor rate company will be willing to pay= Contribution per hour of Mike
		Because demand of Mike is not fully met
		Highest Direct labor Rate=	$                   8.09