Question

Soft and Cuddly Friends (SCF) produces soft dolls. Demand for the dolls is increasing, and management wants you to identify an economical sales and production mix for the coming year. The following information is available:

		Softy		Friendly		Goody		Besty		Lovey
Demand (units)		71,000		59,600		49,700		56,800		101,400
Price per unit	$	26.50	$	11.50	$	42.50	$	20.50	$	16.50
Variable costs:
Direct materials		11.25		3.25		16.60		5.50		8.50
Direct labour		5.20		3.25		9.10		6.50		2.60

The following additional information is available:

a.	The company’s plant has a capacity of 110,000 direct labour-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.
b.	The direct labour rate is $13 per hour; this rate is expected to remain unchanged during the coming year.
c.	Fixed manufacturing costs amount to $690,000 per year. Variable overhead costs are $5 per direct labour-hour.
d.	All of the company’s sales and administrative costs are fixed.

Required:

1.	How many total direct labour-hours will be required to produce the units estimated to be sold during the coming year? Show your computations. (Round your answers to 2 decimal places.)

2.	Keeping in mind the direct labour-hour capacity, what should be the company’s product mix for the upcoming year? Prepare a schedule in support of your recommendation. (Round "Per Unit" to 2 decimal places.)

3.	What is the highest price, in terms of a rate per hour, that SCF would be willing to pay for additional capacity (i.e., for added direct labour time)?

4.	Assume again that the company does not want to reduce sales of any product. Identify ways the company could obtain the additional output. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)
	Adding another shift Contracting out some work to outside suppliers Employing additional labour force Expanding the workforce Eliminating wasted labour time in the production process Utilizing the unutilized capacity Working overtime

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
Softy	5.2	13	0.4
Friendly	3.25	13	0.25
Goody	9.1	13	0.7
Besty	6.5	13	0.5
Lovey	2.6	13	0.2
	Direct Labor hours per unit	Demand	Labor Hours Required
Softy	0.4	71,000	28,400
Friendly	0.25	59,600	14,900
Goody	0.7	49,700	34,790
Besty	0.5	56,800	28,400
Lovey	0.2	101,400	20,280
		Total	126,770
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
Softy	0.4	5	2
Friendly	0.25	5	1.25
Goody	0.7	5	3.5
Besty	0.5	5	2.5
Lovey	0.2	5	1
	Softy	Friendly	Goody	Besty	Lovey
Selling price per unit	26.5	11.5	42.5	20.5	16.5
Direct Material	11.25	3.25	16.6	5.5	8.5
Direct Labor	5.2	3.25	9.1	6.5	2.6
Variable overhead	2	1.25	3.5	2.5	1
Contribution Margin per Unit (A)	8.05	3.75	13.3	6	4.4
Direct Labor hours per unit (B)	0.4	0.25	0.7	0.5	0.2
Contribution margin per direct labor hour(A/B)	20.125	15	19	12	22
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
Softy	71,000	0.4	28,400	571,550
Friendly	59,600	0.25	14,900	223,500
Goody	49,700	0.7	34,790	661,010
Besty	23,260	0.5	11,630	139,560
Lovey	101,400	0.2	20,280	446,160
		Total	110,000	2,041,780
5.highest direct labor rate per hour = Cost + Contribution margin per hour
=$13+12
25
Adding another shift
Contracting some work to outside suppliers
Employing additional work force
Expanding workforce