QUESTION 4 The Gen Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for the dolls 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: ProductDemand Next Year (units)Selling Price per UnitDirect MaterialsDirect Labor Debbie50,000$13. 50$4. 30$3. 20 Trish42,000$5. 50$1. 10$2. 00 Sarah35,000$21. 00$6. 44$5. 60 Mike40,000$10. 00$2. 00$4. 00 Sewing kit325,000$8. 00$3. 20$1. 60
The following additional information is available: a. The company’s plant has a capacity of 130,000 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 $8 per hour is expected to remain unchanged during the coming year. c. Fixed costs total $520,000 per year. Variable overhead costs are $2 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: . Determine the contribution margin per direct labor-hour expended on each product. 2. Prepare a schedule showing the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year. 3. Examine the data you have computed in (1) and (2) above. How would you allocate the 130,000 direct labor hours of capacity to Gen Toy Company’s various products? 4. What is the highest price, in terms of a rate per hour, that Gen Toy Company would be willing to pay for additional capacity (that is, for added direct labor time)? . Assume again that the company does not want to reduce sales of any product. Identify ways in which the company could obtain the additional output. SOLUTION 4 No. 1 Products(1) Selling Price(2) Direct Materials(3) Direct Labor(4) Variable Overheads [(3) / $4](5) Contribution [(1)-(2)-(3)-(4)](6) Labor Hours (direct) [(3) / $8](7) Contribution Margin per (Direct) Labor Hour [(5) / (6)] Debbie$13. 50$4. 30$3. 20$0. 80$5. 20$0. 40$13. 00 Trish$5. 50$1. 10$2. 00$0. 50$1. 90$0. 25$7. 60 Sarah$21. 00$6. 44$5. 60$1. 40$7. 56$0. 70$10. 80
Mike$10. 00$2. 00$4. 00$1. 00$3. 00$0. 50$6. 00 Sewing Kit$8. 00$3. 20$1. 60$0. 40$2. 80$0. 20$14. 00 Workings 1. Variable Overheads=Direct Labor (Direct Labor / VOH Cost) =Direct Labor $4 2. Contribution=Selling Price – Direct Materials – Direct Labor – Variable Overheads 3. Direct Labor Hours=Direct Labor Direct Labor Rate 4. Contribution Margin per Direct Labor Hour=Contribution Direct Labor Hour No. 2 Products(1) Demand Next Year (Units)(2) Direct Labor Hours(3) Total Direct Labor Hours [(1) * (2)] Debbie50,0000. 4020,000 Trish42,0000. 510,500 Sarah35,0000. 7024,500 Mike40,0000. 5020,000 Sewing Kit325,0000. 2065,000 Total DLH Required 140,000 The company’s plant capacity is 130,000 and the above calculation shows that there is a short 10,000 labor hours per year. No. 3 Allocation will be based on the contribution margin per direct labor hour : Product Ranking ProductsContribution Margin Per (Direct) Labor HourRanking Debbie13. 002 Trish7. 604 Sarah10. 803 Mike6. 005 Sewing Kit14. 001 Allocation of Direct Labor Hours ProductsProduction Allocation (1)Direct Labor Hours 2)Direct Labor Hours Usage [(1) x (2)]BalanceWorkings Sewing Kit325,0000. 2065,00065000130,000 – 65,000 Debbie50,0000. 4020,0004500065,000 – 20,000 Sarah35,0000. 7024,5002050045,000 – 24,500 Trish42,0000. 2510,5001000020,500 – 10,500 Mike40,0000. 5020,000-1000010,000 – 20,000 No. 4 An additional labor time may be required to produce the product “Mike” as that is the final product to be produced in the ranking. Therefore, the workings for the relevant cost to produce “Mike” are as follows :- ProductContribution (1)Direct Labor 2)Relevant Cost / Unit [(1) + (2)]Relevant Cost / Hour Mike$3. 00$4. 00$7. 00$7. 00 / $0. 50 = $14. 00 So, the highest rate per hour that can be payable is $14. 00 which is to produce “Mike”. No. 5 There are some other alternative ways which the company could practice in order to obtain the additional output:- ?Provide overtime to the workers so that they can produce more units. ?To introduce high technology equipments to increase productivity. ?Outsource that particular product to external suppliers in order to complete the production on time.
