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 Debbie Trish Sarah Mike Sewing kit Demand Next Selling year Price Direct (units) per Unit Materials 69,000 $41.00 $4.60 61,000 $ 4.50 $1.50 54,000 $30.50 $9.29 46,800 $15.00 $3.90 344,000 $ 9.90 $5.10 Direct Labor $ 4.00 $ 1.00 $ 7.00 $ 5.00 $ 0.50 The following additional information is available: a. The company's plant has a capacity of 100,400 direct labor-hours per year on a single-shift basis. The company's present employees and equipment can produce all five products. b. The direct labor rate of $10 per hour is expected to remain unchanged during the coming year. c. Fixed manufacturing costs total $575,000 per year. Variable overhead costs are $2 per direct labor-hour. d. All of the company's nonmanufacturing costs are fixed. e. 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 100,400 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

Calculation of direct labor hours per unit = Direct labor cost per unit/Rate per hour
	Direct labor Cost	Rate per hour	Direct Labor hours per unit
Debbie	4	10	0.4
Trish	1	10	0.1
Sarah	7	10	0.7
Mike	5	10	0.5
Sewing Kit	0.5	10	0.05
Calculation of variable overhead cost per unit
Variable overhead cost per unit = Labor hours per unit*Variable overhead cost per unit
	Direct Labor hours per unit	Rate per hour	Variable overhead cost per unit
Debbie	0.4	2	0.8
Trish	0.1	2	0.2
Sarah	0.7	2	1.4
Mike	0.5	2	1
Sewing Kit	0.05	2	0.1
	Debbie	Trish	Sarah	Mike	Sewing kit
Selling price per unit	41	4.5	30.5	15	9.9
Direct Material	4.6	1.5	9.29	3.9	5.1
Direct Labor	4	1	7	5	0.5
Variable overhead	0.8	0.2	1.4	1	0.1
Contribution Margin per Unit (A)	31.6	1.8	12.81	5.1	4.2
Direct Labor hours per unit (B)	0.4	0.1	0.7	0.5	0.05
Contribution margin per direct labor hour(A/B)	79	18	18.3	10.2	84
4.Labor hours will be allocated on the basis of maximum contribution margin per hour
Product	Units	Labor hours per unit	Total Labor hours	Contribution Margin
Debbie	69,000	0.4	27,600	2,180,400
Trish	61,000	0.1	6,100	109,800
Sarah	54,000	0.7	37,800	691,740
Mike	23,400	0.5	11,700	119,340
Sewing Kit	344,000	0.05	17,200	1,444,800
		Total	100,400	4,546,080
5.highest direct labor rate per hour = Cost + Contribution margin per hour
=$10+10.2
20.2