Question

The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for the dolls 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	67,000	$30.00	$4.40	$4.40
Trish	59,000	$ 5.40	$1.30	$0.80
Sarah	52,000	$44.00	$8.99	$6.80
Mike	36,000	$16.00	$3.70	$5.20
Sewing kit	342,000	$ 9.70	$4.90	$0.40

The following additional information is available:

  

a.	The company’s plant has a capacity of 115,750 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 $8 per hour is expected to remain unchanged during the coming year.
c.	Fixed costs total $555,000 per year. Variable overhead costs are $4 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.	Determine the contribution margin per direct labor-hour expended on each product. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Product	Contribution Margin per DLH
Debbie
Trish
Sarah
Mike
Sewing kit

2.	Calculate the the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year. (Do not round intermediate calculations.)

  

Product	Total Hours
Debbie
Trish
Sarah
Mike
Sewing Kit
Total hours required

3.	Based on response to Requirement 1 & 2, how much of 115,750 direct labor hours of capacity will be allocated to Walton Toy Company’s various products?

Product	Hours
Debbie
Trish
Sarah
Mike
Sewing kit

4.	What is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?

Total contribution margin ____________________

5.	What is the highest price, in terms of a rate per hour, that Walton Toy Company would be willing to pay for additional capacity (that is, for added direct labor time)? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Highest price

per hour

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
Debbie	4.4	8	0.55
Trish	0.8	8	0.1
Sarah	6.8	8	0.85
Mike	5.2	8	0.65
Sewing Machine	0.4	8	0.05
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
Debbie	0.55	4	2.2
Trish	0.1	4	0.4
Sarah	0.85	4	3.4
Mike	0.65	4	2.6
Sewing Machine	0.05	4	0.2
	Debbie	Trish	Sarah	Mike	Sewing kit
Selling price per unit	30	5.4	44	16	9.7
Direct Material	4.4	1.3	8.99	3.7	4.9
Direct Labor	4.4	0.8	6.8	5.2	0.4
Variable overhead	2.2	0.4	3.4	2.6	0.2
Contribution Margin per Unit (A)	19	2.9	24.81	4.5	4.2
Direct Labor hours per unit (B)	0.55	0.1	0.85	0.65	0.05
Contribution margin per direct labor hour(A/B)	34.54545455	29	29.18823529	6.923077	84
2.Total labor hours required
Product	Units	Labor hours per unit	Total Labor hours
Debbie	67000	0.55	36850
Trish	59000	0.1	5900
Sarah	52000	0.85	44200
Mike	36000	0.65	23400
Sewing Kit	342000	0.05	17100
		Total	127450
3.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
Debbie	67,000	0.55	36,850	1,273,000
Trish	59,000	0.1	5,900	171,100
Sarah	52,000	0.85	44,200	1,290,120
Mike	18,000	0.65	11,700	81,000
Sewing Kit	342,000	0.05	17,100	1,436,400
		Total	115,750	4,251,620
4.Highest contribution Margin = $4,251,620
5.highest direct labor rate per hour = Cost + Contribution margin per hour
=$8+6.92
14.92