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	57,000	$	23.00	$	5.00	$	1.50
Trish	49,000	$	7.00	$	1.80	$	0.60
Sarah	42,000	$	41.00	$	7.49	$	3.00
Mike	45,500	$	10.00	$	2.70	$	2.00
Sewing kit	332,000	$	8.70	$	3.90	$	0.35

The following additional information is available:  

1. The company’s plant has a capacity of 80,520 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 $5 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $590,000 per year. Variable overhead costs are $2 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 80,520 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

Walton Toy Company
1. Calculation of Contribution Margin per DLH
	Debbie	Trish	Sarah	Mike	Sewing Kit
DL cost p.u	1.5	0.6	3	2	0.35
DL Hrs. p.u ( DL cost p.u / 5 )	0.3	0.12	0.6	0.4	0.07
S.P	23	7	41	10	8.7
VC
DM	5	1.8	7.49	2.7	3.9
DL	1.5	0.6	3	2	0.35
VOH ( DL Hrs. p.u * 2 )	0.6	0.24	1.2	0.8	0.14
Total VC	7.1	2.64	11.69	5.5	4.39
Contribution Margin	15.9	4.36	29.31	4.5	4.31
Contribution Margin per DLH	53	36.33333333	48.85	11.25	61.57142857
2. Calculation of Total Labour hours required
Product	DLH p.u	Demand	Total Hrs. needed
Debbie	0.3	57000	17100
Trish	0.12	49000	5880
Sarah	0.6	42000	25200
Mike	0.4	45500	18200
Sewing Kit	0.07	332000	23240
			89620
3. Allocation of Total Labour hours
Product	DLH p.u	Demand	Total Hrs. needed
Debbie (II)	0.3	57000	17100
Trish (IV)	0.12	49000	5880
Sarah(III)	0.6	42000	25200
Mike(V)	0.4	22750	9100
Sewing Kit (I)	0.07	332000	23240
			80520
4. Calculation of Contribution Margin
Product	CM p.u	Units sold	Total contribution
Debbie	15.9	57000	906300
Trish	4.36	49000	213640
Sarah	29.31	42000	1231020
Mike	4.5	11375	51187.5
Sewing Kit	4.31	332000	1430920
			3833067.5
5. Due to the constarined resource that is, direct labour hours, we have to sacrifice
the production of Mike by 22750 units. Mike was giving contribution margin of 11.25 per hour , so the highest
price that Walton toy company will be willing to pay for additional capacity is $ 11.25 + 5= 16.25 per hour.