The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit.

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: Direct Product Debbie Trish Sarah Mike Sewing kit Demand Next year (units) 59,000 51,000 44,000 54,500 334,000 Selling Price per Unit $30.00 $ 7.00 $42.00 $12.00 $ 8.90 $5.20 $2.00 $7.79 $2.90 $4.10 Direct Labor $2.10 $0.70 $4.20 $2.80 $0.35 The following additional information is available: a. The company's plant has a capacity of 76,800 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 $7 per hour is expected to remain unchanged during the coming year. c. Fixed costs total $610,000 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

Explanation / Answer

1) Debbie Trish Sarah Mike Sewing Kit Direct labor cost per unit $2.10 $0.70 $4.20 $2.80 $0.35 Direct labor hours per unit* (a) 0.30 0.10 0.60 0.40 0.05 Selling price $30.00 $7.00 $42.00 $12.00 $8.90 Variable costs: Direct materials $5.20 $2.00 $7.79 $2.90 $4.10 Direct labor $2.10 $0.70 $4.20 $2.80 $0.35 Variable overhead $1.20 $0.40 $2.40 $1.60 $0.20 Total variable costs $8.50 $3.10 $14.39 $7.30 $4.65 Contribution margin (b) $21.50 $3.90 $27.61 $4.70 $4.25 Contribution margin per DLH (b) ÷ (a) $71.67 $39.00 $46.02 $11.75 $85.00 * Direct labor cost per unit ÷ 7 direct labor hours 2) Product Direct labor hours per unit Estimated Sales (units) Total Hours Debbie 0.30 59,000 17,700.00 Trish 0.10 51,000 5,100.00 Sarah 0.60 44,000 26,400.00 Mike 0.40 54,500 21,800.00 Sewing Kit 0.05 334,000 16,700.00 Total Hours Required 87,700.00 3) Excess Hours = 87,700 - 76,800 10900 Hours Mike dolls has the lowest contribution margin per labor hour, its production should be reduced by 27,250 dolls (10,900 excess hours divided by 0.40 hours production time per doll = 27,250 dolls) Thus, production and sales of the Mike doll will be reduced to one-half of that planned. Product Direct labor hours per unit Estimated Sales (units) Total Hours Debbie 0.30 59,000 17,700.00 Trish 0.10 51,000 5,100.00 Sarah 0.60 44,000 26,400.00 Mike (54,500 - 27,250) 0.40 27,250 10,900.00 Sewing Kit 0.05 334,000 16,700.00 Total Hours Required 76,800.00 4) Because the additional capacity would be used to produce the Mike doll, the company should be willing to pay up to $18.75 per hour ($7 usual rate plus $11.75 contribution margin per hour) Total Contribution Margin $18.75 5) The company could employ workers for over time at the usual time-and-a-half rate of $10.50 per hour ($7 × 1.5= $10.50), and still improve overall profit. Highest price $10.50 per hour

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