Valbec Company manufactures and distributes toy doll houses. The toy industry is a seasonal business. 'Therefore, a

Question:

Valbec Company manufactures and distributes toy doll houses. The toy industry is a seasonal business. 'Therefore, a large portion of Valbec's sales occur in the late summer and fall.

The projected sales in units for 20X8 are shown in the schedule below. With a sales price of $\$ 10$ per unit, the total sales revenue for $20 \mathrm{X} 8$ is projected at $\$ 1.2$ million. Valbec scheduled its production in the past so that finished goods inventory at the end of each month, exclusive of a safety stock of 4,000 doll houses, would equal the next month's sales. One-half hour of direct labor time is required to produce each doll house under normal operating conditions. Using the production schedule followed in the past, the total direct labor hours by month that would be required to meet the 20X8 sales estimate are also shown in the schedule following: image text in transcribed

"This schedule does not incorporate any additional direct labor hours resulting from inefficiences.
"Sales for January, $20 X 9$ are projected at 8,000 units.
The production schedule followed in the past requires the scheduling of overtime hours for any production over 8,000 units ( 4,000 direct labor hours) in one month. While the use of overtime is feasible, the Valbec management has decided that it should consider two other possible alternatives: (1) hire temporary help from an agency during the peak months, or (2) expand its labor force and adopt a level production schedule. The use of a second shift was not considered because management believed the community would not support this alternative.
Factory employees are paid $\$ 6.00$ per hour for regular time; the fringe benefits average $20 \%$ of regular pay. For hours worked in excess of 4,000 hours per month, employees receive time and one-half; however, fringe benefits only average $10 \%$ on these additional wages. Past experience has shown that when overtime is required, labor inefficiencies do occur during overtime at the rate of $5 \%$ of overtime hours; this $5 \%$ inefficiency was not included in the direct labor hour estimates presented in the schedule.
Rather than pay overtime to its regular labor force, Valbec could hire temporary employees when production exceeds 8,000 units per month. The temporary workers can be hired through an agency at the same labor rate of $\$ 6.00$ per hour, but there would be no fringe benefit costs. Management estimates that the temporary workers would require $25 \%$ more ore time than the regular employees to produce the doll houses. If Valbec goes to a level production schedule, the labor force would be expanded. However, no overtime would be required. The same labor rate of $\$ 6.00$ per hour and fringe benefit rate of $20 \%$ would apply.
The manufacturing facilities have the capacity to produce 18,000 doll houses per month. On-site storage facilities for completed units are adequate. The estimated annual cost of carrying inventory is $\$ 1$ per unit. Valbec is subject to a $40 \%$ income tax rate.
Required:

(a) Prepare an analysis which compares the costs associated with each of Valbec Company's three alternatives:
(1) Schedule overtime hours.
(2) Hire temporary workers.
(3) Expand labor force and schedule level production.

(b) Identify and discuss briefly the non-cost factors and the factors which are difficult to cost that Valbec Company should consider in conjunction with the cost analysis prepared in requirement A before a final decision is made relative to the three alternatives.

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