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 66,000 $ 37.00 $ 4.30 $ 3.50

Trish 58,000 $ 5.00 $ 1.20 $ 0.84

Sarah 51,000 $ 35.50 $ 8.84 $ 5.60

Mike 37,000 $ 15.00 $ 3.60 $ 4.20

Sewing kit 341,000 $ 9.60 $ 4.80 $ 0.49

The following additional information is available: The company’s plant has a capacity of 115,730 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 $7 per hour is expected to remain unchanged during the coming year. Fixed manufacturing costs total $545,000 per year. Variable overhead costs are $3 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:

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 115,730 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

Product Direct Labor Debbie Trish Sarah Mike Sewing Kit 8.84 Direct Demand Selling Price Material 66000 37.00 4.30 58000 5.00 1.20 51000 35.50 37000 15.00 3.60 341000 9.60 4.80 Direct Labor Hours Available Variable Overhead cost Per Unit Direct Labour Hour Rate 3.50 0.84 5.60 4.20 0.49 115730 Clacullations Product Contriution Margin 27.7 Debbie Trish Sarah Mike Sewing Kit Variable Direct Labor Direct Labors Overhead Required Cost 3.50 0.5 1.5 0.84 0.12 5.60 0.8 0.8 2.4 4.20 0.61 1.8 0.49 0.07 0.21 Contribution Margin Per DLH 55.40 21.67 23.33 9.00 58.57 18.7 5.4 4.1 Variable Overhead Cost Per Unit = Direct Labor * DL Required * Variable OH Rate Contribution Margin = Selling Price- DM - DL - Varaible OH Contribution Margin Per DLH = Contribution Margin / DL Required

Total Direct Labor-Hours Required to Prodcued Direct Labors Direct Labour Contribution Product Demand Total Hours Required Allocated Margin Debbie 66000 0.5 33000 33000 1828200 Trish 58000 0.12 6960 6960 150800 Sarah 51000 0.8 408001 40800 951660 Mike 37000 0.6 222001 11100 99900 Sewing Kit 3410001 0.07 23870 23870 1398100 Total Contribution Margin 4428660 Answers Mike Debbie 0.50 Trish 0.12 Sarah 0.8 Sewing Kit 0.07 Direct Labour Hours Per Unit 0.6 2 Variable OH Cost Per Unit Debbie 1.50 Trish 0.36 Sarah 2.40 Mike Sewing Kit 1.800.21 Debbie 55.40 Trish 21.67 Sarah 23.33 Mike Sewing Kit .00 58.57 Contribution Margin Per DLH 9 4 Highest Contibution Margin 4428660 5 Highest DLH per Hour (7+9) 16.00