Problem 12-25 Volume Trade-Off Decisions [LO12-5, LO12-6] The Walton Toy Company
ID: 2559675 • 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:
The company’s plant has a capacity of 137,510 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 manufacturing costs total $550,000 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 137,510 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 53,000 $ 19.00 $ 4.60 $ 4.40 Trish 45,000 $ 7.00 $ 1.40 $ 1.76 Sarah 38,000 $ 29.00 $ 6.89 $ 6.80 Mike 32,000 $ 13.00 $ 2.30 $ 5.20 Sewing kit 328,000 $ 8.30 $ 3.50 $ 1.36
Explanation / Answer
1) Debbie Trish Sarah Mike Sewing kit direct labor cost per unit 4.4 1.76 6.8 5.2 1.36 direct labor rate per hour 8 8 8 8 8 direct labor hrs per unit 0.55 0.22 0.85 0.65 0.17 2) variable overhead cost incurred Debbie Trish Sarah Mike Sewing kit variable overhead cost per hour 2 2 2 2 2 direct labor hours per unit 0.55 0.22 0.85 0.65 0.17 variabe overhead cost incurred 1.1 0.44 1.7 1.3 0.34 3) total contribution margin Selling price 19 7 29 13 8.3 less:Variable costs direct materials 4.6 1.4 6.89 2.3 3.5 direct labor 4.4 1.76 6.8 5.2 1.36 variable overhead 1.1 0.44 1.7 1.3 0.34 total variable costs 10.1 3.6 15.39 8.8 5.2 contribution margin per unit 8.9 3.4 13.61 4.2 3.1 direct labor hours per unit 0.55 0.22 0.85 0.65 0.17 contribution margin per hours 16.18 15.45 16.01 6.46 18.24 demand CM total product per uni contribution Debbie 53,000 8.9 471,700 trish 45,000 3.4 153000 Sarah 38,000 13.61 517180 mike 32,000 4.2 134400 sewing kit 328,000 3.1 1016800 total contribution margin 2,293,080 answer 4) DLH per estimated total product unit sale units hours Debbie 0.55 53,000 29150 trish 0.22 45,000 9900 Sarah 0.85 38,000 32300 mike 0.65 32,000 20800 sewing kit 0.17 328,000 55760 total hours required 147910 Allocated units contribut total total produced per unit contribution product hours Debbie 29,150 53,000 8.9 471700 trish 9,900 45,000 3.4 153000 Sarah 32,300 38,000 13.61 517180 mike 10,400 16,000 4.2 67200 sewing kit 55,760 328,000 3.1 1016800 total hours required 137,510 2225880 answer 5) highest price will be $8 direct labor rate +$6.46 contribution margin per hours 14.46