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	72,000	$	18.00	$	4.90	$	4.05
Trish	64,000	$	6.50	$	1.80	$	1.89
Sarah	57,000	$	30.00	$	9.74	$	6.75
Mike	40,000	$	15.00	$	4.20	$	4.95
Sewing kit	347,000	$	10.20	$	5.40	$	1.44

The following additional information is available:  

1. The company’s plant has a capacity of 155,110 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 $9 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $605,000 per year. Variable overhead costs are $5 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 155,110 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

Product Debbie Trish Sarah 1.89 6.75 | Direct Demand Selling Price Direct Labor Material 72000 18.00 4.90 4.05 64000 6.50 1.80 57000 30.00 9.74 40000 15.00 4.20 4.95 347000 10.20 5.40 1.44 Direct Labor Hours Available 155110 Variable Overhead cost Per Unit Direct Labour Hour Rate Mike Sewing Kit Clacullations Product Contriution Margin 0.45 6.8 Direct Labor Direct Labors Required 4.05 1.89 0.21 6.75 0.75 4.95 0.55 1.44 0.16 Debbie Trish Sarah Mike Sewing Kit Variable Overhead Cost 2.25 1.05 3.75 2.75 0.8 1.8 Contribution Margin Per DLH 15.11 8.38 13.01 5.64 16.00 9.8 3.1 2.6 Variable Overhead Cost Per Unit = Direct Labor * DL Required * Variable OH Rate Contribution Margin = Selling Price- DM - DL - Varaible OH Contribution Margin Per DLH = Contribution Margin / DL Required

Required Total Hours Total Direct Labor-Hours Required to Prodcued Direct Labors Direct Labour Contribution Product Demand Allocated Margin Debbie 72000 0.45 32400 32400 489600 Trish 64000 0.21 13440 13440 112640 Sarah 570001 0.75 42750 42750 556320 Mike 40000 220001 11000 62000 Sewing Kit 347000 0.16 55520 55520 888320 Total Contribution Margin 2108880 0.55 Answers Debbie 0.45 Trish 0.21 Sarah 0.75 Mike 0.55 Sewing Kit 0.16 Direct Labour Hours Per Unit Debbie 2.25 Trish 1.05 Sarah 3.75 Mike 2.75 Sewing Kit 0.80 Variable OH Cost Per Unit Debbie 15.11 Trish 8.38 Sarah 13.01 Mike Sewing Kit 5.64 16.00 Contribution Margin Per DLH 2108880 Highest Contibution Margin Highest DLH per Hour 14.64