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	50,000	$	16.70	$	4.30	$	6.40
Trish	42,000	$	7.50	$	1.10	$	4.00
Sarah	35,000	$	26.60	$	6.44	$	11.20
Mike	40,000	$	14.00	$	2.00	$	8.00
Sewing kit	325,000	$	9.60	$	3.20	$	3.20

The following additional information is available:  

1. The company’s plant has a capacity of 130,000 direct labor-hours per year on a single-shift basis. The company’s present employees and equipment can produce all five products.

2. The direct labor rate of $16 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $520,000 per year. Variable overhead costs are $2 per direct labor-hour.

4. All of the company’s nonmanufacturing costs are fixed.

5. 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 130,000 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 &2	Product	Demand (units)	Direct labor cost (A)	Direct labor hour (A/16)=B	Variable overhead (B*2=C)
	Debbie	50000	$6.4	$.4	$.8
	Trish	42000	$4	$.25	$.5
	Sarah	35000	$11.2	$.7	$1.4
	Mike	40000	$8	$.5	$1
	Sewing kit	325000	$3.2	$.2	$.4
3 &4	Product	Demand (units)	Selling price	Direct material	Direct labor	variable Overhead	Contribution margin	Contribution margin / direct labor hr	Ranking production	Labor hours utilised	Units	Contribution earned
	Debbie	50000	$16.7	$4.3	$6.4	$.80	$5.2	$13	II	20000	50000	260000
	Trish	42000	$7.5	$1.10	$4	$.50	$1.9	$7.6	IV	10500	42000	79800
	Sarah	35000	$26.6	$6.44	$11.2	$1.40	$7.56	$10.8	III	24500	35000	264600
	Mike	40000	$14	$2	$8	$1	$3	$6	V	10000	20000	60000
	Sewing kit	325000	$9.6	$3.2	$3.2	$.40	$2.8	$14	I	65000	325000	910000
												1574400
5	Demand for all product is satisfied except for mike product, because only 130000 labor hours available.
	For product Mike, its demand is 40000 units while only 20000 units were produced. The remaining
	demand can be met by utilizing additional capacity.
	Selling price of product Mike is $14. After deducting material cost and variable overhead , contribution margin is $11
	For product mike, $11 is the maximum labor cost that can be incurred.
	1 Mike products takes .50 direct labor hours for production. For additional capacity for highest direct labor rate per hour is paid
	$22 (11/.5)