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:

The following additional information is available:   

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.

The direct labor rate of $8 per hour is expected to remain unchanged during the coming year.

Fixed costs total $520,000 per year. Variable overhead costs are $2 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.

Product Demand
Next year
(units) Selling
Price
per Unit Direct
Materials Direct
Labor Debbie 50,000 $13.50 $4.30 $3.20 Trish 42,000 $ 5.50 $1.10 $2.00 Sarah 35,000 $21.00 $6.44 $5.60 Mike 40,000 $10.00 $2.00 $4.00 Sewing kit 325,000 $ 8.00 $3.20 $1.60 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 Margin per DLH Debble Triah Sarah Sewing kr 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.]) Total Hours Debble Triah Saran Sewing K Total hours requlred 3. Based on response to Requirement 1 & 2, how much of 130,000 direct labor hours of capacity will be allocated to Walton Toy Company's various products? Debble Triah Saran sewing kit 4. What is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource? 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)? price per hour

Explanation / Answer

SOLUTION

(A)

* Direct labor cost per unit / 8 direct labor hours.

(B)

(C) Because the Mike doll has the lowest contribution margin per labor hour, its production should be reduced by 20,000 dolls (10,000 excess hours divided by 0.5 hours production time per doll = 20,000 dolls). Thus, production and sales of the Mike doll will be reduced to one-half of that planned, or 20,000 dolls for the year.

Debbie ($) Trish ($) Sarah ($) Mike ($) Sewing kit ($) Direct labor cost per unit 3.20 2.00 5.60 4.00 1.60 Direct labor hours per unit* (a) 0.40 0.25 0.70 0.50 0.20 Selling price 13.50 5.50 21.00 10.00 8.00 Variable costs:   Direct materials 4.30 1.10 6.44 2.00 3.20   Direct labor 3.20 2.00 5.60 4.00 1.60   Variable overhead 0.80 0.50 1.40 1.00 0.40 Total variable costs 8.30 3.60 13.44 7.00 5.20 Contribution margin (b) 5.20 1.90 7.56 3.00 2.80 Contribution margin per DLH (b/a) 13.00 7.60 10.80 6.00 14.00

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