Problem 12-25 Volume Trade-Off Decisions [LO12-5, LO12-6] The Walton Toy Company
ID: 2570790 • 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 eman Next Selling Price Direct Direct (units) per Unit Materials Labor S 3.50 $1.00 S 6.50 $4.50 $0.50 year Product Debbie Trish Sarah Mike Sewing kit $4.70 $1.60 $9.44 $4.00 $5.20 70,000 $38.00 62,000 4.60 55,000 $31.00 48,000 $14.00 345,000 $10.00 The following additional information is available: a. The company's plant has a capacity of 94,500 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 $10 per hour is expected to remain unchanged during the coming year c. Fixed manufacturing costs total $585,000 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 94,500 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 - How many direct labor hours are used to manufacture one unit of each of the company's five products
Debbie
Trish
Sarah
Mike
Sewing kit
Direct labor cost
$3.50
$1.00
$6.50
$4.50
$0.50
Labor rate per hour
$10
$10
$10
$10
$10
Labor hours per unit
0.35
0.1
0.65
0.45
0.05
Req. 2 - How much variable overhead cost is incurred to manufacture one unit of each of the company's five products.
Debbie
Trish
Sarah
Mike
Sewing kit
Labor hours per unit
0.35
0.1
0.65
0.45
0.05
Variable overhead rate per hour
$3
$3
$3
$3
$3
Variable overhead - per unit
$1.05
$0.30
$1.95
$1.35
$0.15
Req. 3 - What is the contribution margin per direct labor hour for each of the company's five products.
Debbie
Trish
Sarah
Mike
Sewing kit
Sales price - per unit
$38.00
$4.60
$31.00
$14.00
$10.00
Variable costs
Direct Material
$4.70
$1.60
$9.44
$4.00
$5.20
Direct labor
$3.50
$1.00
$6.50
$4.50
$0.50
Variable overhead
$1.05
$0.30
$1.95
$1.35
$0.15
Total variable cost
$9.25
$2.90
$17.89
$9.85
$5.85
Contribution Margin - per unit
$28.75
$1.70
$13.11
$4.15
$4.15
Direct labor hours - per unit
$0.35
$0.10
$0.65
$0.45
$0.05
Contribution Margin - per Labor hour
$82.14
$17.00
$20.17
$9.22
$83.00
Req. 4 - Assuming that direct labor hours is the company's constraining resource, what is the highest total contribution margin that company can earn.
Debbie
Trish
Sarah
Mike
Sewing kit
Demand - in units
70000
62000
55000
48000
345000
Labor hours per unit
0.35
0.1
0.65
0.45
0.05
Total Labor hours required
24500
6200
35750
21600
17250
Contribution Margin - per Labor hour
$82.14
$17.00
$20.17
$9.22
$83.00
Production in units
70000
55000
37777
345000
Labor hours per unit
0.35
0.1
0.65
0.45
0.05
Labor hours used
24500
0
35750
17000
17250
Total labor hours used
94,500
Production in units
70000
55000
37777
345000
Contribution Margin - per unit
$28.75
$1.70
$13.11
$4.15
$4.15
Contribution Margin - per product
$20,12,500
$0
$7,21,050
$1,56,775
$14,31,750
Total contribution margin
$43,22,075
Req. 1 - How many direct labor hours are used to manufacture one unit of each of the company's five products
Debbie
Trish
Sarah
Mike
Sewing kit
Direct labor cost
$3.50
$1.00
$6.50
$4.50
$0.50
Labor rate per hour
$10
$10
$10
$10
$10
Labor hours per unit
0.35
0.1
0.65
0.45
0.05
Req. 2 - How much variable overhead cost is incurred to manufacture one unit of each of the company's five products.
Debbie
Trish
Sarah
Mike
Sewing kit
Labor hours per unit
0.35
0.1
0.65
0.45
0.05
Variable overhead rate per hour
$3
$3
$3
$3
$3
Variable overhead - per unit
$1.05
$0.30
$1.95
$1.35
$0.15
Req. 3 - What is the contribution margin per direct labor hour for each of the company's five products.
Debbie
Trish
Sarah
Mike
Sewing kit
Sales price - per unit
$38.00
$4.60
$31.00
$14.00
$10.00
Variable costs
Direct Material
$4.70
$1.60
$9.44
$4.00
$5.20
Direct labor
$3.50
$1.00
$6.50
$4.50
$0.50
Variable overhead
$1.05
$0.30
$1.95
$1.35
$0.15
Total variable cost
$9.25
$2.90
$17.89
$9.85
$5.85
Contribution Margin - per unit
$28.75
$1.70
$13.11
$4.15
$4.15
Direct labor hours - per unit
$0.35
$0.10
$0.65
$0.45
$0.05
Contribution Margin - per Labor hour
$82.14
$17.00
$20.17
$9.22
$83.00
Req. 4 - Assuming that direct labor hours is the company's constraining resource, what is the highest total contribution margin that company can earn.
Debbie
Trish
Sarah
Mike
Sewing kit
Demand - in units
70000
62000
55000
48000
345000
Labor hours per unit
0.35
0.1
0.65
0.45
0.05
Total Labor hours required
24500
6200
35750
21600
17250
Contribution Margin - per Labor hour
$82.14
$17.00
$20.17
$9.22
$83.00
Production in units
70000
55000
37777
345000
Labor hours per unit
0.35
0.1
0.65
0.45
0.05
Labor hours used
24500
0
35750
17000
17250
Total labor hours used
94,500
Production in units
70000
55000
37777
345000
Contribution Margin - per unit
$28.75
$1.70
$13.11
$4.15
$4.15
Contribution Margin - per product
$20,12,500
$0
$7,21,050
$1,56,775
$14,31,750
Total contribution margin
$43,22,075