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	51,000	$	15.50	$	4.40	$	2.70
Trish	43,000	$	6.00	$	1.20	$	1.20
Sarah	36,000	$	25.00	$	6.59	$	4.50
Mike	40,000	$	11.00	$	2.10	$	3.30
Sewing kit	326,000	$	8.10	$	3.30	$	0.90

The following additional information is available:  

1. The company’s plant has a capacity of 118,450 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.

2. The direct labor rate of $6 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $530,000 per year. Variable overhead costs are $3 per direct labor-hour.

4. All of the company’s nonmanufacturing costs are fixed.

5. 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 118,450 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

Solution 1:

	Debbie	Trish	Sarah	Mike	Sewing Kit
Direct labor Cost per unit (a)	$2.70	$1.20	$4.50	$3.30	$0.90
Direct labor Rate per Hour (b)	$6.00	$6.00	$6.00	$6.00	$6.00
Direct labor hours per unit (a/b)	0.45	0.20	0.75	0.55	0.15

Solution 2:

	Debbie	Trish	Sarah	Mike	Sewing Kit
Direct labor hours per unit (a/b)	0.45	0.20	0.75	0.55	0.15
Variable overhead rate per DLH	3	3	3	3	3
Variable Overhead per unit	$1.35	$0.60	$2.25	$1.65	$0.45

Solution 3:

Computation of contribution margin per direct labor-hour
	Debbie	Trish	Sarah	Mike	Sewing Kit
Direct labor Cost per unit (a)	$2.70	$1.20	$4.50	$3.30	$0.90
Direct labor Rate per Hour (b)	$6.00	$6.00	$6.00	$6.00	$6.00
Direct labor hours per unit (a/b)	0.45	0.20	0.75	0.55	0.15
Selling price per unit	$15.50	$6.00	$25.00	$11.00	$8.10
Variable costs:
Direct materials	$4.40	$1.20	$6.59	$2.10	$3.30
Direct labor	$2.70	$1.20	$4.50	$3.30	$0.90
Variable Overhead	$1.35	$0.60	$2.25	$1.65	$0.45
Total variable costs	$8.45	$3.00	$13.34	$7.05	$4.65
Contribution margin per unit	$7.05	$3.00	$11.66	$3.95	$3.45
Contribution margin per DLH	$15.67	$15.00	$15.55	$7.18	$23.00

Solution 4:

Computation of total direct labor-hours required to produce the units estimated
	DLH per unit	Demand (Units)	Total Hours Needed
Debbie	0.45	51000	22950
Trish	0.20	43000	8600
Sarah	0.75	36000	27000
Mike	0.55	40000	22000
Sewing Kit	0.15	326000	48900
Total Direct labor hours required			129450

Computation of direct labor hours of capacity allocated
	Contribution margin per DLH	Ranking	Hours Allocated
Debbie	$15.67	2	22950
Trish	$15.00	4	8600
Sarah	$15.55	3	27000
Mike	$7.18	5	11000
Sewing Kit	$23.00	1	48900
Total			118450

Computation of highest total contribution margin
	Contribution margin per DLH	Hours Allocated	Total Contribution
Debbie	$15.67	22950	$3,59,550
Trish	$15.00	8600	$1,29,000
Sarah	$15.55	27000	$4,19,760
Mike	$7.18	11000	$79,000
Sewing Kit	$23.00	48900	$11,24,700
Total			$21,12,010

Solution 5:

Computation of Highest Price for Additional Capacity
Contribution margin Per DLH of Mike	$7.18
Regular rate of Direct labor	$6.00
Highest Price that can be paid	$13.18