Problem 12-25 Volume Trade-Off Decisions [L012-5, L012-6] The Walton Toy Company
ID: 2585528 • Letter: P
Question
Problem 12-25 Volume Trade-Off Decisions [L012-5, 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 Selling Next year Price Direct Labor $ 4.20 $ 0.77 $ 6.30 $ 4.90 $ 0.42 Direct Product Debbie Trish Sarah Mike Sewing kit (units) per Unit Materials 68,000 $31.00 60,000 $ 5.00 53,000 44.50 34,000 $17.00 343,000 9.80 4.50 $1.40 9.14 3.80 5.00 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: Direct labour hours per unit of each product produce DEBBLE TRISH SARAH MIKE SEWING MACHINE Direct labour cost in $ per unit 4.2 0.77 6.3 4.9 0.42 Labour rate per hour in $ 7 7 7 7 7 Labour hours required per unit of output 0.6 0.11 0.9 0.7 0.06 Req 2: Variable Overheads cost per unit of each Product DEBBLE TRISH SARAH MIKE SEWING MACHINE Labour hours required per unit of output 0.6 0.11 0.9 0.7 0.06 Variable Overhead rate per hour 5 5 5 5 5 Variable Overhead cost per unit 3 0.55 4.5 3.5 0.3 Req 3: Contribution margin per direct labour hour DEBBLE TRISH SARAH MIKE SEWING MACHINE Selling Price per unit 31 5 44.5 17 9.8 Less: Variable cost per unit Direct Material 4.5 1.4 9.14 3.8 5 Direct Labour 4.2 0.77 6.3 4.9 0.42 Variable overheads 3 0.55 4.5 3.5 0.3 Contribution margin per unit 19.3 2.28 24.56 4.8 4.08 Labour hours per unit 0.6 0.11 0.9 0.7 0.06 Contribution margin per labour hour 32.17 20.73 27.29 6.86 68.00 Ranking Based on Highest Contribution II IV III V I Req 4: DEBBLE TRISH SARAH MIKE SEWING MACHINE TOTAL Expected Demand 68000 60000 53000 34000 343000 Labour hours per unit 0.6 0.11 0.9 0.7 0.06 Total Labour hours Required 40800 6600 47700 23800 20580 139480 Less: Total Labour hours available 127580 Shortage hours -11900 -11900 (To be adjusted from Last ranking product) Labour hours used in Production 40800 6600 47700 11900 20580 127580 (23800-11900) Expected Production 68000 60000 53000 17000 343000 (Labour hours used in Production/Hour per unit) Contribution Margin per unit 19.3 2.28 24.56 4.8 4.08 Total Contribution Earned 1312400 136800 1301680 81600 1399440 4231920 Therefore, Total Contribution earned is $ 4231,920 Req 5: If additional Capacity is available, the company will product MIKE which was produced less. And the contribution per hour earned from MIKE is $ 6.86 per hour. Therefore, the company will be willing to pay for additional labour capacity to the extent of $ 6.86 per labour hour.