Direct Labour

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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:
1.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)?

5.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
Trish42,0000.2510,500
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...
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