The Walton Toy Company manufactures a line of dolls and a sewing kit. Demand for
ID: 2528186 • Letter: T
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 72,000 $ 18.00 $ 4.90 $ 4.05 Trish 64,000 $ 6.50 $ 1.80 $ 1.89 Sarah 57,000 $ 30.00 $ 9.74 $ 6.75 Mike 40,000 $ 15.00 $ 4.20 $ 4.95 Sewing kit 347,000 $ 10.20 $ 5.40 $ 1.44 The following additional information is available: The company’s plant has a capacity of 155,110 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 $9 per hour is expected to remain unchanged during the coming year. Fixed manufacturing costs total $605,000 per year. Variable overhead costs are $5 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: 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 155,110 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)?
Explanation / Answer
Solution:
Part 1 --- Direct Labor Hours per unit
Debbie
Trish
Sarah
Mike
Sewing Kit
Direct Labor Cost per unit (A)
$4.05
$1.89
$6.75
$4.95
$1.44
Direct Labor Rate Per Unit (B)
$9.00
$9.00
$9.00
$9.00
$9.00
Direct Labor Hours Per Unit (A/B)
0.45
0.21
0.75
0.55
0.16
Part 2 – Variable Overhead Per Unit
Debbie
Trish
Sarah
Mike
Sewing Kit
Direct Labor Hours Per Unit (As calculated in Part 1) (A)
0.45
0.21
0.75
0.55
0.16
Variable Overhead Cost per direct labor hour (B)
$5.00
$5.00
$5.00
$5.00
$5.00
Variable Overhead Per Unit (A*B)
$2.25
$1.05
$3.75
$2.75
$0.80
Part 3 – Contribution Margin Per DLH
Product
Selling Price Per Unit
Direct materials per unit
Direct Labor per unit
Variable Overhead Per Unit (Refer Part 2)
Total Variable Cost per unit
Contribution margin per unit
Direct Labor Hours Needed Per Unit (refer part 1)
Contribution Margin per DLH
(S)
(A)
(B)
(V)
T = A+B+V
(X = S - T)
(L)
(X/L)
Debbie
$18.00
$4.90
$4.05
$2.25
$11.20
$6.80
0.45
$15.11
Trish
$6.50
$1.80
$1.89
$1.05
$4.74
$1.76
0.21
$8.38
Sarah
$30.00
$9.74
$6.75
$3.75
$20.24
$9.76
0.75
$13.01
Mike
$15.00
$4.20
$4.95
$2.75
$11.90
$3.10
0.55
$5.64
Sewing Kit
$10.20
$5.40
$1.44
$0.80
$7.64
$2.56
0.16
$16.00
Part 4 – Highest total contribution margin the company can earn to make optimal use of constrained resource
We need to first give ranking for the products based on the contribution margin per direct labor hour since labor hour is the constrained resource i.e. limiting factor. And then we will calculate the optimal units can be produced by using limiting factor and limiting sales demand.
Product
Contribution Margin per DLH (from part 4)
Ranking
Maximum Demand
DLH per unit
Total Hours Needed
maximum Hours available
DL Hours used in Otimal Production on the basis of ranking
Maximum Contribution Margin
(A)
(D)
(I)
(P=D*I)
(A*P)
Debbie
$15.11
2
72000
0.45
32400
32400
$489,564
Trish
$8.38
4
64000
0.21
13440
13440
$112,627
Sarah
$13.01
3
57000
0.75
42750
42750
$556,178
Mike
$5.64
5
40000
0.55
22000
11000
(Balancing Figure)
$62,040
Sewing Kit
$16.00
1
347000
0.16
55520
55520
$888,320
166110
155,110
155110
$2,108,729
The maximum contribution margin = $2,108,729
Note --- I have rounded off the contribution margin per direct labor hour to 2 decimal palces..in case difference in answer pls let me know so that I will provide you the complete answer without rounded off the decimal places
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Debbie
Trish
Sarah
Mike
Sewing Kit
Direct Labor Cost per unit (A)
$4.05
$1.89
$6.75
$4.95
$1.44
Direct Labor Rate Per Unit (B)
$9.00
$9.00
$9.00
$9.00
$9.00
Direct Labor Hours Per Unit (A/B)
0.45
0.21
0.75
0.55
0.16
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