PROBLEM 7-25 Utilization of a Constrained Resource [LO 7-5, LO 7-6 The Walton To

Question

PROBLEM 7-25 Utilization of a Constrained Resource [LO 7-5, LO 7-6 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 fiom you in determining an economical sales and production mix for the coming year. The company has provided the following data: Demand Next Year (units) Selling Price per Unit Direct Materials Direct Labor Product Debbie. Trish Sarah . . 50,000 42,000 35,000 40,000 325,000 $13.50 $5.50 $21.00 $10.00 $8.00 $4.30 $1.10 $6.44 $2.00 $3.20 $3.20 $2.00 $5.60 $4.00 $1.60 Sewing kit . 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 employces 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. a. b. c. d. e.

Explanation / Answer

So, 14/hour

6. Compnay could buy the output which it could not made because of resource constraints.

1. Contribution margin per direct labour hour Debbie Trish Sarah Mike Sewing Kit S.Price (A) 13.5 5.5 21 10 8 Material cost (B) 4.3 1.1 6.44 2 3.2 Labour © 3.2 2 5.6 4 1.6 Varaible OH ($ 2/ Hr) (D) 0.8 0.5 1.4 1 0.4 (2*0.4) (2*0.25) (2*0.7) (2*0.5) (2*0.2) Contribution (A-B-C-D) 5.2 1.9 7.56 3 2.8 Labour Hour/unit (Note 1) 0.4 0.25 0.7 0.5 0.2 Contribution margin per direct labour hour 13 7.6 10.8 6 14 Note 1 - Labour Hour requirements Debbie Trish Sarah Mike Sewing Kit Labour cost 3.2 2 5.6 4 1.6 Labour rate/hr 8 8 8 8 8 Labour Hour 0.4 0.25 0.7 0.5 0.2 2. Labour hours reuires to make estimated sales Debbie Trish Sarah Mike Sewing Kit Estimated Sales (Units) 50,000 42,000 35,000 40,000 3,25,000 Labour Hour/unit 0.4 0.3 0.7 0.5 0.2 Total requirements 20,000 10,500 24,500 20,000 65,000 Total labour hours reuires to make estimated sales 1,40,000 3. Allocation of 130,000 direct labour hours would be based on highest contribution / hour basis. Debbie Trish Sarah Mike Sewing Kit Contribution margin per direct labour hour 13 7.6 10.8 6 14 Rank 2 4 3 5 1 Total labour hours reuires to make estimated sales = 140,000 hours Total labour hours avaliable to make estimated sales = 130,000 hours So, deficit hours = 10,000 As contribution/hour is lowest of "MIKE" and it requires 20000 hours to make its estimated sales. So, Compnay would make "MIKE" only with 20,000-10,000 = 10,000 hours Debbie Trish Sarah Mike Sewing Kit Total Avaliable hours 20,000 10,500 24,500 10,000 65,000 1,30,000 Labour Hour 0.4 0.25 0.7 0.5 0.2 Production 50000 42000 35000 20000 325000 4,72,000 4. Contribution from optimal use of resources Debbie Trish Sarah Mike Sewing Kit Total Production 50,000 42,000 35,000 20,000 3,25,000 Contribution/unit 5 2 8 3 3 Total Contribution' 2,60,000 79,800 2,64,600 60,000 9,10,000 15,74,400 5. Highest price that the compnay would pay for obtain extra labours $ 8/hour (existing rate) + $6/hour (Contribution/ hour from MIKE)

So, 14/hour

6. Compnay could buy the output which it could not made because of resource constraints.

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