Problem 12-25 Volume Trade-Off Decisions [LO12-5, L012-6] The Walton Toy Company
ID: 2528416 • Letter: P
Question
Problem 12-25 Volume Trade-Off Decisions [LO12-5, L012-6] 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 Demand Next Selling Price Direct Product Debb i e Trish Sarah Mike Sewing kit year (units) per Unit Materials 68,000 $31.00 60,000 5.00 53,000 $44.50 34,000 $17.00 $4.50 $1.40 $9.14 $3.80 $5.00 Direct Labor $ 4.20 $ 0.77 6.30 $4.90 $ 0.42 343,000 9.80 The following additional information is available a. The company's plant has a capacity of 127,580 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 $7 per hour is expected to remain unchanged during the coming year c. Fixed manufacturing costs total $565,000 per year. Variable overhead costs are $5 per direct labor-hour d. All of the company's nonmanufacturing costs are fixec e. 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 127,580 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)?Explanation / Answer
Req 1 Debbie Trish Sarah Mike Sewing Kit Labour cost per unit 4.20 0.77 6.30 4.90 0.42 labouor rate per hour 7.00 7.00 7.00 7.00 7.00 Labour hours per unit 0.60 0.11 0.90 0.70 0.06 Req 2: Debbie Trish Sarah Mike Sewing Kit Labour cost per unit 4.20 0.77 6.30 4.90 0.42 labouor rate per hour 7.00 7.00 7.00 7.00 7.00 Labour hours per unit 0.60 0.11 0.90 0.70 0.06 Variable OH rate per hour 5.00 5.00 5.00 5.00 5.00 variable OH cost per unit 3.00 0.55 4.50 3.50 0.30 Req 3: Debbie Trish Sarah Mike Sewing Kit Selling price 31.00 5.00 44.50 17.00 9.80 Less: variable cost Material 4.50 1.40 9.14 3.80 5.00 labour 4.20 0.77 6.30 4.90 0.42 Variable OH per unit 3.00 0.55 4.50 3.50 0.30 Contribution margin per unit 19.30 2.28 24.56 4.80 4.08 Divide laboour hour per unit 0.60 0.11 0.90 0.70 0.06 Contribution margin per hour 32.17 20.73 27.29 6.86 68.00 Ranking II IV III V I Req 4: Total labour hours available 127580.00 Less: Used in order of ranking Sewing kit (343000*0.06) 20580 Debbie (68000*0.60) 40800 Sarah (53000*0.90) 47700 Trish (60000*0.11) 6600 Available for Mike 11900.00 Contribution earned: Product Hrs used CM per hour Total contribution Debbie 40800 32.17 1312536 Trish 6600 20.73 136818 sarah 47700 27.29 1301733 Mike 11900 6.86 81634 Sewing kit 20580 68 1399440 Total Contribution 4232161 Req 5: Additional labour horus will be utilized in productionof Mike only. Therefore, the company will be willing to pay the additional to the extent contribution margin per hour earned from mike. Therefore, maximum rate which will be paid for Labour is as follows: Existing price 7 Add: Additional amount that can be paid 6.86 MAXIMUM RATE which company can pay 13.86