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	54,000	$	23.00	$	4.70	$	5.40
Trish	46,000	$	5.00	$	1.50	$	1.80
Sarah	39,000	$	30.00	$	7.04	$	8.10
Mike	30,000	$	14.00	$	2.40	$	6.30
Sewing kit	329,000	$	8.40	$	3.60	$	1.35

The following additional information is available:  

a. The company’s plant has a capacity of 136,550 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 $9 per hour is expected to remain unchanged during the coming year.

c. Fixed manufacturing costs total $560,000 per year. Variable overhead costs are $3 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 136,550 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

Answer:

1. How many direct labor hours are used to manufacture one unit of each of the company’s five products?

	A	B	C	D	E
Product	Demand	Selling	Direct	Direct	E= D/$9
	Next year	Price	Materials	Labor	Labor Hour Used
	(units)	per Unit
Debbie	54000	23	4.7	5.4	0.6
Trish	46000	5	1.5	1.8	0.2
Sarah	39000	30	7.04	8.1	0.9
Mike	30000	14	2.4	6.3	0.7
Sewing kit	329000	8.4	3.6	1.35	0.15

2. How much variable overhead cost is incurred to manufacture one unit of each of the company’s five products?

	E	F
Product	E= D/$9	F=Ex $3
	Labor Hour Used	Variable Over head
	(as calculated above)
Debbie	0.6	1.8
Trish	0.2	0.6
Sarah	0.9	2.7
Mike	0.7	2.1
Sewing kit	0.15	0.45

3. What is the contribution margin per direct labor-hour for each of the company’s five products?

	B	C	D	F	G	H
Product	Selling	Direct	Direct	F=Ex $3	G=B-c-d-f	H=g/e
	Price	Materials	Labor	Variable Over head	Contribution per unit	Contribution per labor Hour
	per Unit
Debbie	23	4.7	5.4	1.8	11.1	18.5
Trish	5	1.5	1.8	0.6	1.1	5.5
Sarah	30	7.04	8.1	2.7	12.16	13.5
Mike	14	2.4	6.3	2.1	3.2	4.6
Sewing kit	8.4	3.6	1.35	0.45	3	20

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?

		I	J	K	L
Product		I=Ax E			K =JxG
	Rank	Labor Hour required	capacity allocations per rank	Optimal production plant	Highest Contribution
Debbie	2	32400	32400	54000	599400
Trish	4	9200	9200	46000	50600
Sarah	3	35100	35100	39000	474240
Mike	5	21000	10500	15000	48000
Sewing kit	1	49350	49350	329000	987000

5. Assuming that the company has made optimal use of its 136,550 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:

Because the additional capacity would be used to produce the Mike doll, the company should be willing to pay up to $13.6 per hour ($9usual rate plus $4.6 contribution margin per hour) for added labor time.