The Walton Toy Company manufactures a line of dolls and a sewing kit. Demand for
ID: 2563309 • 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:
The following additional information is available:
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.
The direct labor rate of $5 per hour is expected to remain unchanged during the coming year.
Fixed manufacturing costs total $590,000 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.
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 80,520 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)?
Product DemandNext year
(units) Selling
Price
per Unit Direct
Materials Direct
Labor Debbie 57,000 $ 23.00 $ 5.00 $ 1.50 Trish 49,000 $ 7.00 $ 1.80 $ 0.60 Sarah 42,000 $ 41.00 $ 7.49 $ 3.00 Mike 45,500 $ 10.00 $ 2.70 $ 2.00 Sewing kit 332,000 $ 8.70 $ 3.90 $ 0.35
Explanation / Answer
1 & 2 1) Direct labor hours used to manufacture one unit of each product--Answer in Column [6] 2) Variable overhead cost per unit---Answer in Column [7] Product Demand Selling Direct Direct Direct Labor hours per unit Variable overhead cost per unit Total Variable Cost per unit Contribution per unit Next year Price Materials Labor (units) per Unit [1] [2] [3] [4] [5] [6] [7] [8] [9] Debbie 57000 23.00 5.00 1.50 0.30 0.60 7.10 15.90 Trish 49000 7.00 1.80 0.60 0.12 0.24 2.64 4.36 Sarah 42000 41.00 7.49 3.00 0.60 1.20 11.69 29.31 Mike 45500 10.00 2.70 2.00 0.40 0.80 5.50 4.50 Sewing kit 332000 8.70 3.90 0.35 0.07 0.14 4.39 4.31 3) CONTRIBUTION MARGIN PER DLH: Product Contribution Margin per DLH Debbie 53.00 Trish 36.33 Sarah 48.85 Mike 11.25 Sewing Kit 61.57 DIRECT LABOR HOURS REQUIRED TO PRODUCE THE ESTIMATED UNITS TO BE SOLD: Product DLH Required Debbie 17100 Trish 5880 Sarah 25200 Mike 18200 Sewing Kit 23240 Total hours required 89620 4) ALLOCATION OF DLH FOR DIFFERENT PRODUCTS & TOTAL CONTRIBUTION MARGIN: Direct labor hours is to be allocated according to the CM per unit of DLH, with the Product having the highest CM per DLH getting the first allocation and so on descending order of CM per DLH. Hence, Mke with the lowest CM per DLH will have the last priority; hence its production will be limited; The allocations of DLH are tabulated below. The total CM for each product is also shown in the last column. Product Allocated quantity DLH allocated CM per unit Total CM Debbie 57000 17100 15.90 906300 Trish 49000 5880 4.36 213640 Sarah 42000 25200 29.31 1231020 Mike 22750 9100 4.50 102375 Sewing Kit 332000 23240 4.31 1430920 80520 3884255 Answer 5) The highest price that can be paid is that which will give 0 contribution per DLH for Mike, which has the lowest contribution margin per DLH Hence, it is $5.00+11.25 = $16.25 $5.00 is the existing DLH rate and $11.25 is the contribution per DLH for Mike
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