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	75,000	$	28.00	$	5.20	$	4.80
Trish	67,000	$	5.70	$	2.10	$	1.36
Sarah	60,000	$	33.50	$	10.19	$	7.20
Mike	36,000	$	18.00	$	4.50	$	5.60
Sewing kit	350,000	$	10.50	$	5.70	$	0.96

The following additional information is available:  

The company’s plant has a capacity of 164,990 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 manufacturing costs total $635,000 per year. Variable overhead costs are $4 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 164,990 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

	1)
					Debbie	Trish	Sarah	Mike	Sewing kit
	direct labor cost per unit				4.8	1.36	7.2	5.6	0.96
	direct labor rate per hour				8	8	8	8	8
	direct labor hrs per unit				0.6	0.17	0.9	0.7	0.12
	2)	variable overhead cost incurred
					Debbie	Trish	Sarah	Mike	Sewing kit
	variable overhead cost per hour				4	4	4	4	4
	direct labor hours per unit				0.6	0.17	0.9	0.7	0.12
	variabe overhead cost incurred				2.4	0.68	3.6	2.8	0.48
	3)	total contribution margin
	Selling price				28	5.7	33.5	18	10.5
	less:Variable costs
	direct materials				5.2	2.1	10.19	4.5	5.7
	direct labor				4.8	1.36	7.2	5.6	0.96
	variable overhead				2.4	0.68	3.6	2.8	0.48
	total variable costs				12.4	4.14	20.99	12.9	7.14
	contribution margin per unit				15.6	1.56	12.51	5.1	3.36
	direct labor hours per unit				0.6	0.17	0.9	0.7	0.12
	contribution margin per hours				26.00	9.18	13.90	7.29	28.00	answer
	Raning				2	4	3	5	1
		demand	CM	total
	product		per uni	contribution
	Debbie	75,000	15.6	1,170,000
	trish	67,000	1.56	104520
	Sarah	60,000	12.51	750600
	mike	36,000	5.1	183600
	sewing kit	350,000	3.36	1176000
	total contribution margin			3,384,720
4)			DLH per	estimated	total
	product		unit	sale units	hours
	Debbie		0.6	75,000	45000
	trish		0.17	67,000	11390
	Sarah		0.9	60,000	54000
	mike		0.7	18,000	12,600
	sewing kit		0.12	350,000	42000
	total hours required				164,990
					Allocated	units	contribut	total
					total	produced	per unit	contribution
	product				hours
	Debbie				45,000	75,000	15.6	1170000
	trish				11,390	67,000	1.56	104520
	Sarah				54,000	60,000	12.51	750600
	mike				12,600	18,000	5.1	91800
	sewing kit				42,000	350,000	3.36	1176000
	total hours required				164,990			3292920	answer
5)
	highest price will be		$8direct labor rate +$5.10 contribution margin per hours
			13.1	answer