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 companys 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:

Product	Demand Next year (units)	Selling Price per Unit		Direct Materials		Direct Labor
Debbie	52,000	$	17.00	$	4.50	$	2.80
Trish	44,000	$	6.50	$	1.30	$	1.40
Sarah	37,000	$	26.00	$	6.74	$	4.90
Mike	40,800	$	12.00	$	2.20	$	3.50
Sewing kit	327,000	$	8.20	$	3.40	$	1.05

The following additional information is available:

1. The companys plant has a capacity of 114,750 direct labor-hours per year on a single-shift basis. The companys present employees and equipment can produce all five products.

2. The direct labor rate of $7 per hour is expected to remain unchanged during the coming year.

3. Fixed manufacturing costs total $540,000 per year. Variable overhead costs are $4 per direct labor-hour.

4. All of the companys nonmanufacturing costs are fixed.

5. The companys 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 companys five products?

2. How much variable overhead cost is incurred to manufacture one unit of each of the companys five products?

3. What is the contribution margin per direct labor-hour for each of the companys five products?

4. Assuming that direct labor-hours is the companys 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 114,750 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)?