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 Debbie Trish Sarah Mike Sewing kit Demand Selling Next year Price (units) per Unit 64,000 $22.00 56,000 $ 8.00 49,000 $38.50 45,600 $ 13.00 339,000 $ 9.40 Direct Materials $4.10 $2.50 $8.54 $3.40 $4.60 Direct Labor $ 3.20 $ 1.94 $ 5.60 $ 4.00 $ 0.64 The following additional information is available: a. The company's plant has a capacity of 105,700 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 $8 per hour is expected to remain unchanged during the coming year. c. Fixed manufacturing costs total $525,000 per year. Variable overhead costs are $5 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. 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 105,700 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

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
Debbie	3.2	8	0.4
Trish	1.04	8	0.13
Sarah	5.6	8	0.7
Mike	4	8	0.5
Sewing Machine	0.64	8	0.08
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
Debbie	0.4	5	2
Trish	0.13	5	0.65
Sarah	0.7	5	3.5
Mike	0.5	5	2.5
Sewing Machine	0.08	5	0.4
	Debbie	Trish	Sarah	Mike	Sewing kit
Selling price per unit	22	8	38.5	13	9.4
Direct Material	4.1	2.5	8.54	3.4	4.6
Direct Labor	3.2	1.04	5.6	4	0.64
Variable overhead	2	0.65	3.5	2.5	0.4
Contribution Margin per Unit (A)	12.7	3.81	20.86	3.1	3.76
Direct Labor hours per unit (B)	0.4	0.13	0.7	0.5	0.08
Contribution margin per direct labor hour(A/B)	31.75	29.3076923	29.8	6.2	47
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
Debbie	64,000	0.4	25,600	812,800
Trish	56,000	0.13	7,280	213,360
Sarah	49,000	0.7	34,300	1,022,140
Mike	22,800	0.5	11,400	70,680
Sewing Kit	339,000	0.08	27,120	1,274,640
		Total	105,700	3,393,620
5.highest direct labor rate per hour = Cost + Contribution margin per hour
=$8+6.2
14.2	per hour