Question

The Montrose Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for the dolls is increasing, and management requests assistance from you in determining the best 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
Marcy	25,800	$35.00	$3.50	$4.90
Tina	41,800	$28.00	$2.70	$3.80
Cari	39,800	$25.00	$5.10	$9.70
Lenny	45,800	$22.00	$3.60	$7.50
Sewing kit	458,000	$21.00	$2.20	$3.40

The following additional information is available:

a.	The company’s plant has a capacity of 157,200 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 $15 per hour is expected to remain unchanged during the coming year.
c.	Fixed costs total $354,000 per year. Variable overhead costs are $3 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.	Determine the contribution margin per direct labor-hour expended on each product. (Round your final answers to 2 decimal places.)

      

2.	Calculate the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole unit.)

     

4.	What is the highest price, in terms of a rate per hour, that Montrose Toy Company should be willing to pay for additional capacity (that is, for added direct labor time)? (Round your intermediate calculations and final answer to 2 decimal places.)

      

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
Marcy	4.9	15	0.326666667
Tina	3.8	15	0.253333333
Cari	9.7	15	0.646666667
Lenny	7.5	15	0.5
Sewing Kit	3.4	15	0.226666667
Total Labor hours required
Product	Units	Labor hours per unit	Total Labor hours
Marcy	25800	0.326666667	8428
Tina	41800	0.253333333	10589.33333
Cari	39800	0.646666667	25737.33333
Lenny	45800	0.5	22900
Sewing Kit	458000	0.226666667	103813.3333
		Total	171468	hours
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
Marcy	0.326666667	3	0.98
Tina	0.253333333	3	0.76
Cari	0.646666667	3	1.94
Lenny	0.5	3	1.5
Sewing Kit	0.226666667	3	0.68
	Marcy	Tina	Cari	Lenny	Sewing Kit
Selling price per unit	35	28	25	22	21
Direct Material	3.5	2.7	5.1	3.6	2.2
Direct Labor	4.9	3.8	9.7	7.5	3.4
Variable overhead	0.98	0.76	1.94	1.5	0.68
Contribution Margin per Unit (A)	25.62	20.74	8.26	9.4	14.72
Direct Labor hours per unit (B)	0.326666667	0.25333333	0.646666667	0.5	0.227
Contribution margin per direct labor hour(A/B)	78.42857143	81.8684211	12.77319588	18.8	64.94
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
Marcy	25,800	0.32666667	8,428	660,996
Tina	41,800	0.25333333	10,589	866,932
Cari	17,736	0.64666667	11,469	146,500
Lenny	45,800	0.5	22,900	430,520
Sewing Kit	458,000	0.22666667	103,813	6,741,760
		Total	157,200	8,846,708
5.highest direct labor rate per hour = Cost + Contribution margin per hour
=$15+12.77
27.77	per hour