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	62,000	$	20.50	$	5.50	$	3.60
Trish	54,000	$	7.00	$	2.30	$	1.32
Sarah	47,000	$	34.00	$	8.24	$	7.20
Mike	56,000	$	15.00	$	3.20	$	4.80
Sewing kit	337,000	$	9.20	$	4.40	$	0.72

The following additional information is available:  

The company’s plant has a capacity of 84,160 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 $12 per hour is expected to remain unchanged during the coming year.

Fixed manufacturing costs total $640,000 per year. Variable overhead costs are $3 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 84,160 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. How many direct labor hours are used to manufacture one unit of each of the company’s five products?
	Particulars	Debbie	Trish	Sarah	Mike	Sewing Kit
1	Direct Labout Cost Per Unit	3.6	1.32	7.2	4.8	0.72
2	Labour Cost Per Hour	12	12	12	12	12
3	Direct Labout hours used to Manufacture one unit(1/2)	0.3	0.11	0.6	0.4	0.06
	2.How much variable overhead cost is incurred to manufacture one unit of each of the company’s five products?
	Particulars	Debbie	Trish	Sarah	Mike	Sewing Kit
1	Actual Variable Overhead Cost per labour hour	3	3	3	3	3
2	Direct Labout hours used to Manufacture one unit	0.3	0.11	0.6	0.4	0.06
3	Variable Overhead cost per Unit(1*2)	0.9	0.33	1.8	1.2	0.18
	3.What is the contribution margin per direct labor-hour for each of the company’s five products?
	Particulars	Debbie	Trish	Sarah	Mike	Sewing Kit
1	Selling Price Per Unit	20.5	7	34	15	9.2
2	Less: Variable cost
	a.Direct Material cost	5.5	2.3	8.24	3.2	4.4
	b.Direct Labour cost	3.6	1.32	7.2	4.8	0.72
	c.Variable Overhead cost	0.9	0.33	1.8	1.2	0.18
	d.Total Variable cost	10	3.95	17.24	9.2	5.3
3	Contribution Margin(1-2d)	10.5	3.05	16.76	5.8	3.9
4	Direct Labout hours used to Manufacture one unit	0.3	0.11	0.6	0.4	0.06
5	Contribution Margin per Direct Labour Hour(3/4)	35	27.72	27.93	14.5	65
6	ranking	2	4	3	5	1
	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?
	Particulars	Debbie	Trish	Sarah	Mike	Sewing Kit
1	Demand For Next year	62000	54000	47000	56000	337000
2	Direct labour Hours Used	0.3	0.11	0.6	0.4	0.06
3	Total Direct Labour Hours Needed(1*2)	18600	5940	28200	22400	20220
4	Ranking	4	5	1	2	3
5	Direct Labour Hours Used(allocated based on ranking)	13340	_	28200	22400	20220
6	Contribution Margin per Direct Labour Hour	35	27.72	27.93	14.5	65
7	Total Contribution	466900		787626	324800	1314300
	5. Assuming that the company has made optimal use of its 84,160 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)?
	Additional Contribution due to Additional Capacity	95360-84160=11200
		5260*35+5940*27.72=348756.8
	Average Additional rate for additional Hours =348756/11200=31.14
	Highest Direct labor rate=35+12=$47 per hour
	If Company Produces all units then average rate should be taken then 12+31.14=$43.14