Relevant Costs
Complete below problems present your responses in an Excel spreadsheet.
PROBLEM 1:
The Walton 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:
|
|
Demand Next
|
Selling Price
|
Direct
|
Direct
|
|
Product
|
Year (units)
|
per Unit
|
Materials
|
Labor
|
|
Debbie...................
|
50,000 |
$13.50
|
$4.30
|
$3.20
|
|
Trish ......................
|
42,000 |
$5.50
|
$1.10
|
$2.00
|
|
Sarah ....................
|
35,000 |
$21.00
|
$6.44
|
$5.60
|
|
Mike ......................
|
40,000 |
$10.00
|
$2.00
|
$4.00
|
|
Sewing kit .............
|
325,000 |
$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 requirements 1 and 2. How would you allocate the 130,000 direct labor-hours of capacity to Walton Toy Company's various products?
4. What is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?
5. What is the highest price, in terms of a rate per hour, that Walton Toy Company would be willing to pay for additional capacity (that is, for added direct labor time)?
6. 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.
PROBLEM 2:
Make or Buy Analysis
"In my opinion, we ought to stop making our own drums and accept that outside supplier's offer," said WimNiewindt, managing director of Antilles Refining, N.V., of Aruba. "At a price of $18 per drum, we would be paying $5 less than it costs us to manufacture the drums in our own plant. Since we use 60,000 drums a year, that would be an annual cost savings of $300,000." Antilles Refining's current cost to manufacture one drum is given below (based on 60,000 drums per year):
Direct materials ........................................................................ $10.35
Direct labor ................................................................................ 6.00
Variable overhead ...................................................................... 1.50
Fixed overhead ($2.80 general company overhead, $1.60 depreciation and, $0.75 supervision) ................. 5.15
Total cost per drum .............................................................. $23.00
A decision about whether to make or buy the drums is especially important at this time because the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are: Alternative 1: Rent new equipment and continue to make the drums. The equipment would be rented for $135,000 per year. Alternative 2: Purchase the drums from an outside supplier at $18 per drum.The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labor and variable overhead costs by 30%. The old equipment has no resale value. Supervision cost ($45,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 90,000 drums per year.The company's total general company overhead would be unaffected by this decision.
Required:
1. To assist the managing director in making a decision, prepare an analysis showing the total cost and the cost per drum for each of the two alternatives given above. Assume that 60,000 drums are needed each year. Which course of action would you recommend to the managing director?
2. Would your recommendation in requirement 1 be the same if the company's needs were: (a) 75,000 drums per year or (b) 90,000 drums per year? Show computations to support your answer, with costs presented on both a total and a per unit basis.
3. What other factors would you recommend that the company consider before making a decision?