The Montrose Toy Company manufactures a line of dolls and a doll dress sewing ki

Question

The Montrose 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 the best sales and production mix for the coming year. The company has provided the following data:

The following additional information is available:

a. The company’s plant has a capacity of 156,400 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 $18 per hour is expected to remain unchanged during the coming year.

c. Fixed costs total $352,000 per year. Variable overhead costs are $3 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.

Required:

1. Determine the contribution margin per direct labor-hour expended on each product.

2. Calculate the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year.

3. What is the highest price, in terms of a rate per hour, that Montrose Toy Company should be willing to pay for additional capacity (that is, for added direct labor time)?

Product demand next year (units) selling price per unit direct materials direct labor marcy 25,600 $39 $3.90 $5.50 tina 41,600 $32 $3.10 $4.40 cari 39,600 $29 $5.90 $11.30 lenny 45,600 $26 $4.20 $8.90 sewing kit 456,000 $25 $2.60 $4.00

Explanation / Answer

Solution:-

* Direct labor cost per unit / $18 per direct labor hour

2. Calculate the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year:-

3. What is the highest price, in terms of a rate per hour, that Montrose Toy Company should be willing to pay for additional capacity:-

Because the additional capacity would be used to produce the Cari doll, the company should be willing to pay up to $33.79 per DLH ($18 usual labor rate plus $15.790 contribution margin per DLH) for added labor time. Thus, the company could employ workers for overtime at the usual time-and-a-half rate of $27.00 per hour ($18.00 × 1.5 = $27.00) and still improve overall profit.

Please Rate or comment if you have any doubt regarding this solution.

Marcy Tina Cari Lenny Sewing Kit Direct labor cost per unit 5.50 4.40 11.30 8.90 4.00 Direct labor hours per unit* (a) 0.306 0.244 0.628 0.494 0.222 Selling price 39 32 29 26 25 Variable cost: Direct materials 3.90 3.10 5.90 4.20 2.60 Direct labor 5.50 4.40 11.30 8.90 4.00 Variable overhead 0.918 .732 1.884 1.482 0.666 Total variable cost 10.318 8.232 19.084 14.582 7.266 Contribution margin (b) 28.682 23.768 9.916 11.418 17.734 Contribution margin per DLH (b) / (a) 93.732 97.410 15.790 23.113 79.883

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