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

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 from you in determining an economi sales and production mix for the coming year. The company has provided the following data: cal Demand Next Year (units) Selling Price per Unit Direct Materials Direct Labor Product Debbie Trish Sarah . . . Mike. Sewing kit 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 The following additional information is available: a. 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. b. The direct labor rate of S8 per hour is expected to remain unchanged during the coming year c. Fixed costs total S520.000 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.

Explanation / Answer

1 Products: Debble Trish Sarah Mike Sewing Kit Selling Price PU 13.50 5.50 21.00 10.00 8.00 Products: Debble Trish Sarah Mike Sewing Kit Less: Direct Material 4.30 1.10 6.44 2.00 3.20 Direct Labor Cost 3.20 2.00 5.60 4.00 1.60 Less: Direct Labor 3.20 2.00 5.60 4.00 1.60 Rate Per DLH 8.00 8.00 8.00 8.00 8.00 Contribution Margin 6.00 2.40 8.96 4.00 3.20 DLH 0.40 0.25 0.70 0.50 0.20 Direct Labor Hour 0.40 0.25 0.70 0.50 0.20 Contribution Margin Per DLH 15.00 9.60 12.80 8.00 16.00 Ranking 2 4 3 5 1 2 Products: Debble Trish Sarah Mike Sewing Kit Direct Labor Cost 3.20 2.00 5.60 4.00 1.60 Rate Per DLH 8.00 8.00 8.00 8.00 8.00 DLH 0.40 0.25 0.70 0.50 0.20 No of Product to be Sold 50000 42000 35000 40000 325000 DLH in Total (Units*DLH) 20000 10500 24500 20000 65000 Total Requirement 140000 3 & 4 DLH Capacity 130000 Since it is below the requirement; we should go for optimul mix Using the Capacity basis Ranking Products: Ranking No of Products DLH Used CM Per Unit Total CM Debble 2 50000 20000 6.00 300000 (Unit produced*CM PU) Trish 4 40000 10500 2.40 96000 (Unit produced*CM PU) Sarah 3 35000 24500 8.96 313600 (Unit produced*CM PU) Mike 5 20000 10000 4.00 80000 (Unit produced*CM PU) Sewing Kit 1 325000 65000 3.20 1040000 (Unit produced*CM PU) 130000 1829600 Total Used in First 4 Rank Pro 120000 DLH Capacity 130000 Balance 10000 DLH for Rank 5 Pr 0.50 No of Products 20000 (500/0.50) 5 Total Units Demand for Mike 40000 Less: Unit with Ava Capacity 20000 Balance Units 20000 Sales 200000 (20000*10) Less: Material 40000 (20000*2) Contribution Before DL 160000 No of Hours 10000 (20000*0.5) MaxRate Per DLH 16.00 (312000/10000) 6 Company has to hire additional Labor

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