Question

The Walton 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 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	50,000	$13.50	$4.30	$3.20
Trish	42,000	$ 5.50	$1.10	$2.00
Sarah	35,000	$21.00	$6.44	$5.60
Mike	40,000	$10.00	$2.00	$4.00
Sewing kit	325,000	$ 8.00	$3.20	$1.60

The following additional information is available:   

The company’s plant has a capacity of 130,000 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.

The direct labor rate of $8 per hour is expected to remain unchanged during the coming year.

Fixed costs total $520,000 per year. Variable overhead costs are $2 per direct labor-hour.

All of the company's nonmanufacturing costs are fixed.

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. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

  

2. Calculate the the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year. (Do not round intermediate calculations.)

  

3. Based on response to Requirement 1 & 2, how much of 130,000 direct labor hours of capacity will be allocated to Walton Toy Company’s various products?

  

4. What is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?

5. What is the highest price, in terms of a 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. Contribution margin per direct labour-hour expended on each product.

Product	Debbie	Trish	Sarah	Mike	Sewing Kit
Selling Price Per Unit	$13.50	$ 5.50	$21.00	$10.00	$ 8.00
Less:
Direct Materials Per Unit	$4.30	$1.10	$6.44	$2.00	$3.20
Direct Labour Per Unit	$3.20	$2.00	$5.60	$4.00	$1.60
Variable Overhead Per Unit	$0.8	$0.5	$1.4	$1	$0.4
Contribution Margin	$5.2	$1.9	$7.56	$3	$2.8
Labour Hours Per Unit	0.4	0.25	0.7	0.5	0.2
Contribution Margin Per Labour Hour	$13	$7.6	$10.8	$6	$14
Rank	2	4	3	5	1

Labour Hours Per Unit

Product	Direct Labour Cost	Labour Hour Per Unit
Debbie	$3.20	0.4 Hours
Trish	$2.00	0.25 Hours
Sarah	$5.60	0.7 Hours
Mike	$4.00	0.5 Hours
Sewing Kit	$1.60	0.2 Hours

2. Total direct labor-hours that will be required to produce the units estimated to be sold during the coming year

Product	Demand Estimated (In Units)	Labour Hour Per Unit	Total Direct Labour Hours
Debbie	50,000	0.4 Hours	20000
Trish	42,000	0.25 Hours	10500
Sarah	35,000	0.7 Hours	24500
Mike	40,000	0.5 Hours	20000
Sewing Kit	325,000	0.2 Hours	65000
Total			140000

3. Direct Labour Hour Capacity Allocation

Product	Rank	Direct Labour Hours Allocated	Units Prouced
Debbie	2	20000	50,000
Trish	4	10500	42,000
Sarah	3	24500	35,000
Mike	5	10000	20,000
Sewing Kit	1	65000	325,000

4. Highest Total Contribution Earned with Optimal Utilization of Resouces

Product	Units Prouced	Contribution Per Unit	Total Contribution
Debbie	50,000	$5.2	$260,000
Trish	42,000	$1.9	$79,800
Sarah	35,000	$7.56	$264,600
Mike	20,000	$3	$60,000
Sewing Kit	325,000	$2.8	$910000
Total			$15,74,400

5.Company would be willing to pay for additional capacity of 10000 hours at Maximum Labour Charges $6 per hour as contribution earned from Mike product is $6 per labour hour. So that would be maximum price company will be willing to pay.