Problem 12-25 Volume Trade-Off Decisions [LO12-5, LO12-6] The Walton Toy Company
ID: 2529772 • Letter: P
Question
Problem 12-25 Volume Trade-Off Decisions [LO12-5, LO12-6]
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:
The following additional information is available:
a.The company’s plant has a capacity of 118,450 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 $6 per hour is expected to remain unchanged during the coming year.
c.Fixed manufacturing costs total $530,000 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. 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 118,450 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 51,000 $ 15.50 $ 4.40 $ 2.70 Trish 43,000 $ 6.00 $ 1.20 $ 1.20 Sarah 36,000 $ 25.00 $ 6.59 $ 4.50 Mike 40,000 $ 11.00 $ 2.10 $ 3.30 Sewing kit 326,000 $ 8.10 $ 3.30 $ 0.90
Explanation / Answer
1) Calculation of direct labor hours per unit for each product
2) Calculation of Variable Overhead Cost
3) Calculation of contribution margin per labor hour (Amounts in $)
4) Based on the ranking given in requirement 3, the product with highest contribution margin per hour (i.e. with ranking 1) should be produced first and so on.
Available Direct Labor Hours = 118,450 labor hrs
Calculation of Maximum Contribution Margin (Amounts in $)
Shortage of Labor Hours = Total Required Labor Hours - Total Available Labor Hours
= 129,450 - 118,450 = 11,000 hours
As the last ranking (i.e. ranking 5) is given to the product Mike, this shortage of labor hours of 11,000 will be set off from the total hours required for Mike.
Hence the labor hours available to Mike = 22,000 - 11,000 = 11,000 hrs.
The possible units of Product Mike = 11,000 hrs/0.55 hr per unit = 20,000 units
Therefore, the demand for all other products will be fulfilled completely but the production of product Mike will be only 20,000 units. The contribution margin from the optimal use of labor hours is shown as follows:-
Particulars Debbie Trish Sarah Mike Sewing Kit Direct Labor per unit (A) $2.70 $1.20 $4.50 $3.30 $0.90 Direct Labor Rate per hour (B) $6.00 $6.00 $6.00 $6.00 $6.00 Direct Labor hours per unit (A/B) 0.45 0.20 0.75 0.55 0.15