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	70,000	$	38.00	$	4.70	$	3.50
Trish	62,000	$	4.60	$	1.60	$	1.00
Sarah	55,000	$	31.00	$	9.44	$	6.50
Mike	48,000	$	14.00	$	4.00	$	4.50
Sewing kit	345,000	$	10.00	$	5.20	$	0.50

The following additional information is available:  

1. The company’s plant has a capacity of 94,500 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 $10 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $585,000 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 94,500 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

1)
				Debbie	Trish	Sarah	Mike	Sewing kit
direct labor cost per unit				3.5	1	6.5	4.5	0.5
direct labor rate per hour				10	10	10	10	10
direct labor hrs per unit				0.35	0.1	0.65	0.45	0.05
2)	variable overhead cost incurred
				Debbie	Trish	Sarah	Mike	Sewing kit
variable overhead cost per hour				3	3	3	3	3
direct labor hours per unit				0.35	0.1	0.65	0.45	0.05
variabe overhead cost incurred				1.05	0.3	1.95	1.35	0.15
3)	total contribution margin
Selling price				38	4.6	31	14	10
less:Variable costs
direct materials				4.7	1.6	9.44	4	5.2
direct labor				3.5	1	6.5	4.5	0.5
variable overhead				1.05	0.3	1.95	1.35	0.15
total variable costs				9.25	2.9	17.89	9.85	5.85
contribution margin per unit				28.75	1.7	13.11	4.15	4.15
direct labor hours per unit				0.35	0.1	0.65	0.45	0.05
contribution margin per hours				82.14	17.00	20.17	9.22	83.00	answer
Ranking				2	4	3	5	1

4)			DLH per	estimated	total
	product		unit	sale units	hours
	Debbie		0.35	70,000	24500
	trish		0.1	62,000	6200
	Sarah		0.65	55,000	35750
	mike		0.45	24,000	10,800
	sewing kit		0.05	345,000	17250
	total hours required				94,500
					Allocated	units	contribut	total
					total	produced	per unit	contribution
	product				hours
	Debbie				24,500	70,000	28.75	2012500
	trish				6,200	62,000	1.7	105400
	Sarah				35,750	55,000	13.11	721050
	mike				10,800	24,000	4.15	99600
	sewing kit				17,250	345,000	4.15	1431750
	total hours required				94,500			4370300	answer
5)
	highest price will be		$10direct labor rate +$9.22 contribution margin per hours
			19.22	answer