The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit.
ID: 2535496 • Letter: T
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 Demand Selling Next year Price Direct Direct Product Debbie Trish Sarah Mike (units) per Unit Materials Labor 57,000 $23.00 $5.00 $1.50 49,000 $ 7.00 $1.80 $0.60 42,000 $41.00 $7.49 $3.00 45,500 $10.00 $2.70 $2.00 332,000 Sewing kit $8.70 $3.90 $0.35 The following additional information is available a. The company's plant has a capacity of 80,520 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 $5 per hour is expected to remain unchanged during the coming year. c. Fixed costs total $590,000 per year. Variable overhead costs are $2 per direct labor- hour d. All of the company's nonmanufacturing costs are fixec 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.)Explanation / Answer
Walton Toy Company
Product
Contribution margin per direct labor hour
Debbie
$53
Trish
$36.33
Sarah
$48.85
Mike
$11.25
Sewing Kit
$61.57
Product
selling price per unit
Direct material cost per unit
Direct labor cost per unit
Variable overhead per unit
Total variable cost per unit
Contribution margin per unit
direct labor hours per unit
Contribution margin per direct labor hour
Debbie
$23
$5
$1.50
$0.60
$7.10
$15.90
0.30 hours
$53
Trish
$7
$1.80
$0.60
$0.24
$2.64
$4.36
0.12 hours
$36.33
Sarah
$41
$7.49
$3
$1.20
$11.69
$29.31
0.60 hours
$48.85
Mike
$10
$2.70
$2
$0.80
$5.50
$4.50
0.40 hours
$11.25
Sewing Kit
$8.70
$3.90
$0.35
$0.14
$4.39
$4.31
0.07 hours
$61.57
Determination of the number of direct labor hours needed to manufacture one unit of each of the company’s five products:
Product
Direct labor
Direct labor cost per hour
direct labor hours per unit
Variable overhead per unit at $2 per DLH
Debbie
$1.50
$5
0.3
$0.60
Trish
$0.60
$5
0.12
$0.24
Sarah
$3.00
$5
0.6
$1.20
Mike
$2.00
$5
0.4
$0.80
Sewing Kit
$0.35
$5
0.07
$0.14
Direct labor hour per unit is calculated as follows,
Total direct labor hour per unit/direct labor hour
Direct labor hour rate = $5 per hour
For instance, direct labor hour for the product Debbie = $1.50/$5 =0.3 hours
Determination of the variable overhead cost incurred to manufacture one unit of each of the company’s five products:
Product
direct labor hours per unit
Variable overhead per unit at $2 per DLH
Debbie
0.3
$0.60
Trish
0.12
$0.24
Sarah
0.6
$1.20
Mike
0.4
$0.80
Sewing Kit
0.07
$0.14
Product
Direct labor hour per unit
estimated Demand in units
Total direct labor hours
Debbie
0.3
57,000
17,100
Trish
0.12
49,000
5,880
Sarah
0.60
42,000
25,200
Mike
0.40
45,500
18,200
Sewing Kit
0.07
332,000
23,240
Total direct labor hours needed
89,620
Product
Hours
Debbie
$17,100
Trish
$5,880.00
Sarah
$25,200.00
Mike
$9,100.00
Sewing Kit
$23,240.00
Since the available direct labor hours at the factory = 80,520 and the needed direct labor hours = 89,620, the direct labor hour is a constraint.
The available direct labor hours are to be allotted to the products that earn the highest contribution margin per direct labor hour.
Determination of contribution per direct labor hour is as follows,
Contribution per direct labor hour = contribution per unit/direct labor hours per unit
For instance, contribution per direct labor hour for the product Sarah is arrived at as follows,
Contribution per unit = $29.31; direct labor hours per unit = 0.60 hours
Contribution per direct labor hour = $29.31/0.6 hours =$48.85
Accordingly, the contribution per direct labor hour for each product and respective ranking is as follows,
Product
Contribution per direct labor hour
Ranking
Debbie
$53.00
II
Trish
$36.33
IV
Sarah
$48.85
III
Mike
$11.25
V
Sewing Kit
$61.57
I
Since the product Sewing Kit earns highest contribution per direct labor hour, available direct labor hours are to allotted first for the production of the expected units of Sewing Kit.
Total available direct labor hours at the plant =80,520 hours
Sewing Kit –
Demand in units for next year332,000
Direct labor hour per unit0.07 hours
Direct labor hours needed to produce 332,000 units = 332,000 x 0.07 hours = 23,240 hours
Remaining direct labor hours at plant = 80,520 – 23,240 =57,280 hours
The next product with highest ranking is Debbie.
Debbie –
Demand in units for next year 57,000
Direct labor hours per unit0.30
Direct labor hours needed to produce 57,000 units = 57,000 x 0.30 = 17,100 hours
Remaining direct labor hours at plant = 57,280 – 17,100 = 40,180
The next product in terms of highest ranking is Sarah.
Sarah –
Demand in units for next year 42,000
Direct labor hours per unit0.60 hours
Direct labor hours needed to produce 42,000 units = 42,000 x 0.60 = 25,200 hours
Remaining direct labor hours at plant = 40,180 – 25,200 = 14,980
The next product in terms of highest ranking is Trish.
Trish –
Demand in units for next year49,000
Direct labor hours per unit0.12 hours
Direct labor hours needed to produce 49,000 units = 49,000 x 0.12 = 5,880 hours
Remaining direct labor hours at plant = 14,980 – 5,880 = 9,100 hours
The product with the least ranking is Mike.
Mike –
Remaining direct labor hours for Mike = 9,100
Direct labor hours per unit0.40
The number of units of Mike that can be produced using 9,100 direct labor hours = 9,100/.40 = 22,750 units
Product
Units
Contribution margin per unit
Contribution margin
Debbie
57,000
$15.90
$906,300
Trish
49,000
$4.36
$213,640
Sarah
42,000
$29.31
$1,231,020
Mike
22,750
$4.50
$102,375
Sewing Kit
332,000
$4.31
$1,430,920
Total contribution $3,884,255
Since the additional capacity would be used to produce the product Mike, the highest price the company would be willing to pay is as arrived at as follows,
Total price for additional direct labor hour capacity$5 + $11.25 = $16.25
Product
Contribution margin per direct labor hour
Debbie
$53
Trish
$36.33
Sarah
$48.85
Mike
$11.25
Sewing Kit
$61.57
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