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	75,000	$	28.00	$	5.20	$	4.80
Trish	67,000	$	5.70	$	2.10	$	1.36
Sarah	60,000	$	33.50	$	10.19	$	7.20
Mike	36,000	$	18.00	$	4.50	$	5.60
Sewing kit	350,000	$	10.50	$	5.70	$	0.96

The following additional information is available:  

1. The company’s plant has a capacity of 164,990 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 $8 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $635,000 per year. Variable overhead costs are $4 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 164,990 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

Required 1 :
	Debbie	Trish	Sarah	Mike	Sewing kit
Direct labor cost per unit	4.80	1.36	7.20	5.60	0.96
(/) Direct labor rate per hour	8	8	8	8	8
Direct labor hours per unit	0.60	0.17	0.90	0.70	0.12

Required 2 :
	Debbie	Trish	Sarah	Mike	Sewing kit
Direct labor hours per unit	0.60	0.17	0.90	0.70	0.12
(*) Variable overhead cost per direct labor hour	4	4	4	4	4
Variable overhead cost per unit	2.40	0.68	3.60	2.80	0.48

Required 3 :
	Debbie	Trish	Sarah	Mike	Sewing kit
Selling price per unit	28.00	5.70	33.50	18.00	10.50
(-) Direct materials per unit	5.20	2.10	10.19	4.50	5.70
(-) Direct labor cost per unit	4.80	1.36	7.20	5.60	0.96
(-) Variable overhead cost per unit	2.40	0.68	3.60	2.80	0.48
Contribution margin per unit	15.60	1.56	12.51	5.10	3.36
(/) Direct labor hours per unit	0.60	0.17	0.90	0.70	0.12
Contribution margin per DLH	26.00	9.18	13.90	7.29	28.00

Required 4 :
As the direct labor hours is the company's constraining resource, the company will produce the products in preference of contribution margin per direct labor hours.
	Rank of production
Debbie	2
Trish	4
Sarah	3
Mike	5
Sewing kit	1

	Debbie	Trish	Sarah	Mike	Sewing kit	Total
Direct labor hours per unit	0.60	0.17	0.90	0.70	0.12
(*) Demand in units	75000	67000	60000	36000	350000
Total direct labor hours	45000	11390	54000	25200	42000	177590

Total Direct labor hours available	164990
Total direct labor hours for Sewing it, Debbie, Sarah & Trish = 42000 + 45000 + 54000 + 11390	152390
Direct labor hours left for Mike = Total direct labor hours available - Total direct labor hours for Sewing it, Sarah, Debbie & Trish = 164990 - 152390	12600
Units of Mike that can be produced = Direct labor hours left for Mike / Direct labor hours per unit of Mike = 12600 / 0.70	18000	units

	Debbie	Trish	Sarah	Mike	Sewing kit	Total
Units production	75000	67000	60000	18000	350000
(*) Contribution margin per unit	15.60	1.56	12.51	5.10	3.36
Total contribution margin	1170000	104520	750600	91800	1176000	3292920

Highest total contribution margin

3292920

Required 5 :
Selling price of Mike	18.00
(-) Direct materials per unit of Mike	4.50
(-) Variable overhead per unit of Mike	2.80
Maximum direct labor cost per unit	10.70
(/) Direct labor hours per unit of Mike	0.70
Highest price	15.29	per hour