The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit.
ID: 2530156 • 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:
Product
Demand
Next year
(units)
Selling
Price
per Unit
Direct
Materials
Direct
Labor
Debbie
50,000
$13.50
$4.30
$3.20
Trish
42,000
$ 5.50
$1.10
$2.00
Sarah
35,000
$21.00
$6.44
$5.60
Mike
40,000
$10.00
$2.00
$4.00
Sewing kit
325,000
$ 8.00
$3.20
$1.60
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 employees 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.
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.)
Product
Contribution Margin per DLH
Debbie
Trish
Sarah
Mike
Sewing kit
2. Calculate the the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year. (Do not round intermediate calculations.
Product
Total Hours
Debbie
Trish
Sarah
Mike
Sewing Kit
Total hours required
0
3. Based on response to Requirement 1 & 2, how much of 130,000 direct labor hours of capacity will be allocated to Walton Toy Company’s various products?
Product
Hours
Debbie
Trish
Sarah
Mike
Sewing kit
4. What is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?
Total contribution margin
5. What is the highest price, in terms of a rate per hour, that Walton Toy Company would be willing to pay for additional capacity (that is, for added direct labor time)?
Highest price
per hour
Product
Demand
Next year
(units)
Selling
Price
per Unit
Direct
Materials
Direct
Labor
Debbie
50,000
$13.50
$4.30
$3.20
Trish
42,000
$ 5.50
$1.10
$2.00
Sarah
35,000
$21.00
$6.44
$5.60
Mike
40,000
$10.00
$2.00
$4.00
Sewing kit
325,000
$ 8.00
$3.20
$1.60
Explanation / Answer
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 = $7.56; direct labor hours per unit = 0.70 hours
Contribution per direct labor hour = $7.56/0.70 hours =$10.80
Accordingly, the contribution per direct labor hour for each product and respective ranking is as follows,
Product
Contribution per direct labor hour
Ranking
Debbie
$13.00
II
Trish
$7.60
IV
Sarah
$10.80
III
Mike
$6.00
V
Sewing Kit
$14.00
I
Determination of contribution margin per unit and per direct labor hour for all the products:
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 per direct labor hour
Debbie
$13.50
$4.30
$3.20
$0.80
$8.30
$5.20
0.40 hours
$13.00
Trish
$5.50
$1.10
$2
$0.50
$3.60
$1.90
0.25 hours
$7.60
Sarah
$21
$6.44
$5.60
$1.40
$13.44
$7.56
0.70 hours
$10.80
Mike
$10
$2
$4
$1.00
$7.00
$3.00
0.50 hours
$6.00
Sewing Kit
$8
$3.20
$1.60
$0.40
$5.20
$2.80
0.20 hours
$14.00
Product
Direct labor hours
estimated production
Total direct labor hours
Debbie
$0.40
50,000
20,000
Trish
$0.25
42,000
10,500
Sarah
0.7
35,000
24,500
Mike
0.5
40,000
20,000
Sewing Kit
0.2
325,000
65,000
Total direct labor hours
140,000
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 = $7.56; direct labor hours per unit = 0.70 hours
Contribution per direct labor hour = $7.56/0.70 hours =$10.80
Accordingly, the contribution per direct labor hour for each product and respective ranking is as follows,
Product
Contribution per direct labor hour
Ranking
Debbie
$13.00
II
Trish
$7.60
IV
Sarah
$10.80
III
Mike
$6.00
V
Sewing Kit
$14.00
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 = 130,000 hours
Sewing Kit –
Demand in units for next year325,000
Direct labor hour per unit0.20 hours
Direct labor hours needed to produce 325,000 units = 325,000 x 0.2 hours = 65,000 hours
Remaining direct labor hours at plant = 130,000 – 65,000 = 65,000
The next product with highest ranking is Debbie.
Debbie –
Demand in units for next year 50,000
Direct labor hours per unit0.40
Direct labor hours needed to produce 50,000 units = 50,000 x 0.40 = 20,000 hours
Remaining direct labor hours at plant = 65,000 – 20,000 = 45,000
The next product in terms of highest ranking is Sarah.
Sarah –
Demand in units for next year 35,000
Direct labor hours per unit0.70 hours
Direct labor hours needed to produce 35,000 units = 35,000 x 0.70 = 24,500 hours
Remaining direct labor hours at plant = 45,000 – 24,500 = 20,500 hours
The next product in terms of highest ranking is Trish.
Trish –
Demand in units for next year42,000
Direct labor hours per unit0.25 hours
Direct labor hours needed to produce 42,000 units = 42,000 x 0.25 = 10,500 hours
Remaining direct labor hours at plant = 20,500 – 10,500 = 10,000 hours
The product with the least ranking is Mike.
Mike –
Demand in units for next year 40,000
Direct labor hours per unit0.50
Direct labor hours needed to produce 40,000 units = 40,000 x 0.50 = 20,000 hours
However, the available direct labor hours are 10,000
Hence, the number of units of Mike that can be produced with the available direct labor hours = 10,000 hrs/0.50 hrs
= 20,000 units
Computation of the highest total contribution margin that the company can earn by making the optimal use of constrained resource:
Product
Units
Contribution margin per unit
Contribution margin
Debbie
50,000
$5.20
$260,000
Trish
42,000
$1.90
$79,800
Sarah
35,000
$7.56
$264,600
Mike
20,000
$3.00
$60,000
Sewing Kit
325,000
$2.80
$910,000
Total contribution margin $1,574,400
Less: Fixed costs$520,000
Net operating income$1,054,400
Determination of the highest direct labor rate per hour that the company would be willing to pay for additional capacity:
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$8 + $6 = $14 per hour
Product
Contribution per direct labor hour
Ranking
Debbie
$13.00
II
Trish
$7.60
IV
Sarah
$10.80
III
Mike
$6.00
V
Sewing Kit
$14.00
I
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