The Walton Toy Company manufactures a line of dolls and a sewing kit. Demand for

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 Demand selling Next year Price per Direct Direct Product (units) Unit Materials Labor Debbie 73,000 $25.00 Trish 65,000 6.00 Sarah 58,000 $32.50 Mike37,000 $16.00 348,000 $10.30 $5.00 $3.50 $1.90 $1.05 $9.89 $5.60 $4.30 $4.20 ng $5.50 $0.70 kit The following additional information is available: a. The company's plant has a capacity of 138,550 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 manufacturing costs total $615,000 per year. Variable overhead costs are $2 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. 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 138,550 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

1) Calculation of direct labor hours per unit for each product

2) Calculation of Variable Overhead Cost

3) Calculation of contribution margin per labor hour (Amounts in $)

4) Based on the ranking given in requirement 3, the product with highest contribution margin per hour (i.e. with ranking 1) should be produced first and so on.

Available Direct Labor Hours = 138,550 labor hrs

Calculation of Maximum Contribution Margin (Amounts in $)

Shortage of Labor Hours = Total Required Labor Hours - Total Available Labor Hours

= 149,650 - 138,550 = 11,100 hours

As the last ranking (i.e. ranking 5) is given to the product Mike, this shortage of labor hours of 11,100 will be set off from the total hours required for Mike.

Hence the labor hours available to Mike = 22,200 - 11,100 = 11,100 hrs.

The possible units of Product Mike = 11,100 hrs/0.60 hr per unit = 18,500 units

Therefore, the demand for all other products will be fulfilled completely but the production of product Mike will be only 18,500 units. The contribution margin from the optimal use of labor hours is shown as follows:-

Particulars Debbie Trish Sarah Mike Sewing Kit Direct Labor per unit (A) $3.50 $1.05 $5.60 $4.20 $0.70 Direct Labor Rate per hour (B) $7.00 $7.00 $7.00 $7.00 $7.00 Direct Labor hours per unit (A/B) 0.50 0.15 0.80 0.60 0.10

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