Requirement - 1:
Direct labor hour: Direct labor hour refers to the labor hour incurred by an employee to manufacture a unit of product. It refers to the direct labor cost because this cost can be easily assigned to a unit of production.
To identify: How many direct labor hours are used to manufacture one unit of the each of the company’s five products?
Requirement - 1:
Answer to Problem 25P
Solution:
For Debbie;
For Trish;
For Sarah;
For Mike;
For Sewing kit;
Thus total direct labor hours used to manufacture one unit of each of the company’s five products will be;
(0.40 + 0.25 + 0.70 + 0.50 + 0.20) = 2.05 hours
Explanation of Solution
Given:
Following information are given in the question:
Direct labor rate = $16 per hour
Debbie direct labor cost per unit = $6.40
Trish direct labor cost per unit = $4
Sarah direct labor cost per unit = $11.20
Mike direct labor cost per unit = $8
Sewing kit direct labor cost per unit = $3.20
Formula used:
Following formula will be used;
Calculation:
For Debbie;
Direct labor rate = $16 per hour
Direct labor cost per unit = $6.40
Now let’s put the values in given formula;
For Trish;
Direct labor rate = $16 per hour
Direct labor cost per unit = $4
Now let’s put the values in given formula;
For Sarah;
Direct labor rate = $16 per hour
Direct labor cost per unit = $11.20
Now let’s put the values in given formula;
For Mike;
Direct labor rate = $16 per hour
Direct labor cost per unit = $8
Now let’s put the values in given formula;
For Sewing kit;
Direct labor rate = $16 per hour
Direct labor cost per unit = $3.20
Now let’s put the values in given formula;
Thus total direct labor hours used to manufacture one unit of each of the company’s five products will be;
(0.40 + 0.25 + 0.70 + 0.50 + 0.20) = 2.05 hours
Thus above calculated direct labor hours used to manufacture one unit of each product.
Requirement - 2:
Variable overhead cost: Variable overhead cost refers to that portion of overhead cost which change as per the level of production. In other words we can say that when production increases then variable overhead cost will increase or vice versa.
To identify: How muchvariable overhead cost is incurred to manufacture one unit of the each of the company’s five products?
Requirement - 2:
Answer to Problem 25P
Solution:
For Debbie;
Variable cost incurred (0.40 * $2) = $0.80
For Trish;
Variable cost incurred (0.25 * $2) = $0.50
For Sarah;
Variable cost incurred (0.70 * $2) = $1.40
For Mike;
Variable cost incurred (0.50 * $2) = $1
For Sewing kit;
Variable cost incurred (0.20 * $2) = $0.40
Thus total variable cost incurred to manufacture one unit of each of the company’s five products will be;
($0.80 + $0.50 + $1.40 + $1 + $0.40) = $4.10
Explanation of Solution
Given:
Following information are given in the question:
Variable overhead rate per direct labor hour = $2
Direct labor hour used for one unit of Debbie = 0.40
Direct labor hour used for one unit of Trish = 0.25
Direct labor hour used for one unit of Sarah = 0.70
Direct labor hour used for one unit of Mike = 0.50
Direct labor hour used for one unit of Sewing kit = 0.20
Formula used:
Following formula will be used;
Calculation:
For Debbie;
Variable overhead rate per direct labor hour = $2
Direct labor hour used for one unit of Debbie = 0.40
Now let’s put the values in given formula;
Variable cost incurred (0.40 * $2) = $0.80
For Trish;
Variable overhead rate per direct labor hour = $2
Direct labor hour used for one unit of Trish = 0.25
Now let’s put the values in given formula;
Variable cost incurred (0.25 * $2) = $0.50
For Sarah;
Variable overhead rate per direct labor hour = $2
Direct labor hour used for one unit of Sarah = 0.70
Now let’s put the values in given formula;
Variable cost incurred (0.70 * $2) = $1.40
For Mike;
Variable overhead rate per direct labor hour = $2
Direct labor hour used for one unit of Mike = 0.50
Now let’s put the values in given formula;
Variable cost incurred (0.50 * $2) = $1
For Sewing kit;
Variable overhead rate per direct labor hour = $2
Direct labor hour used for one unit of Sewing kit = 0.20
Now let’s put the values in given formula;
Variable cost incurred (0.20 * $2) = $0.40
Thus total variable cost incurred to manufacture one unit of each of the company’s five products will be;
($0.80 + $0.50 + $1.40 + $1 + $0.40) = $4.10
Thus above calculated is the variable cost incurred to manufacture one unit of each of the company’s five products.
Requirement - 3:
Contribution margin: Contribution margin is the difference between selling price and variable cost. In other words we can say that excess of selling price over variable cost is known as contribution margin.
To identify: Contribution margin per direct labor for each of the company’s five products.
Requirement - 3:
Answer to Problem 25P
Solution:
Contribution margin per direct labor for each of the company’s five products will be calculated with the help of following table;
Debbie | Trish | Sarah | Mike | Sewing Kit | |
Selling price | $16.70 | $7.50 | $26.60 | $14.00 | $9.60 |
Less: Variable costs; | |||||
Direct material | $4.30 | $1.10 | $6.44 | $2.00 | $3.20 |
Direct labor | $6.40 | $4.00 | $11.20 | $8.00 | $3.20 |
Total variable costs | ($10.70) | ($5.10) | ($17.64) | ($10.00) | ($6.40) |
Contribution margin per unit | $6.00 | $2.40 | $8.96 | $4.00 | $3.20 |
Direct labor hours used per unit | 0.40 | 0.25 | 0.70 | 0.50 | 0.20 |
Contribution margin per direct labor hour | $15 | $9.60 | $12.80 | $8 | $16 |
Explanation of Solution
Given:
Following information are given in the question:
Selling price for one unit of Debbie = $16.70
Selling price for one unit of Trish = $7.50
Selling price for one unit of Sarah = $26.60
Selling price for one unit of Mike = $14.00
Selling price for one unit of Sewing kit = $9.60
Total variable costs for one unit of Debbie = $10.70
Total variable costs for one unit of Trish = $5.10
Total variable costs for one unit of Sarah = $17.64
Total variable costs for one unit of Mike = $10.00
Total variable costs for one unit of Sewing kit = $6.40
Direct labor hour used for one unit of Debbie = 0.40
Direct labor hour used for one unit of Trish = 0.25
Direct labor hour used for one unit of Sarah = 0.70
Direct labor hour used for one unit of Mike = 0.50
Direct labor hour used for one unit of Sewing kit = 0.20
Formula used:
Following formula will be used;
Calculation:
Contribution margin per direct labor for each of the company’s five products will be calculated with the help of following table;
Debbie | Trish | Sarah | Mike | Sewing Kit | |
Selling price | $16.70 | $7.50 | $26.60 | $14.00 | $9.60 |
Less: Variable costs; | |||||
Direct material | $4.30 | $1.10 | $6.44 | $2.00 | $3.20 |
Direct labor | $6.40 | $4.00 | $11.20 | $8.00 | $3.20 |
Total variable costs | ($10.70) | ($5.10) | ($17.64) | ($10.00) | ($6.40) |
Contribution margin per unit | $6.00 | $2.40 | $8.96 | $4.00 | $3.20 |
Direct labor hours used per unit | 0.40 | 0.25 | 0.70 | 0.50 | 0.20 |
Contribution margin per direct labor hour | $15 | $9.60 | $12.80 | $8 | $16 |
Contribution margin per unit is calculated as follow;
For Debbie;
($16.70 − $10.70) = $6.00
For Trish;
($7.50 − $5.10) = $2.40
For Sarah;
($26.60 − $17.64) = $8.96
For Mike;
($14.00 − $10.00) = $4.00
For Sewing Kit;
($9.60 − $6.40) = $3.20
Contribution per direct labor hour is calculated as follow;
For Debbie;
For Trish;
For Sarah;
For Mike;
For Sewing Kit;
Thus above calculated is the contribution margin per direct labor hour of each of the company’s five products.
Requirement - 4:
Contribution margin: Contribution margin is the difference between selling price and variable cost. In other words we can say that excess of selling price over variable cost is known as contribution margin.
To identify: Highestcontribution margin that the company can earn if it makes optimal use of its’ constrained resources.
Requirement - 4:
Answer to Problem 25P
Solution:
For getting maximum contribution margin company will use direct labor hours to the products those have higher contribution margin. So let’s calculate highest contribution margin;
Debbie | Trish | Sarah | Mike | Sewing Kit | |
Total direct labor hours used | 20000 | 10500 | 24500 | 20000 | 65000 |
Contribution margin per direct labor hour | $15 | $9.60 | $12.80 | $8 | $16 |
Total contribution margin | $300000 | $100800 | $313600 | $80000 | $1040000 |
Thus total highest contrubution margin will be;
($300000 + $100800 + $313600 + $80000 + $1040000) = $1834400
Explanation of Solution
Given:
Following information are given in the question:
Total direct labor hours available = 130000
Contribution margin per direct labor hour of Debbie = $15
Contribution margin per direct labor hour of Trish = $9.60
Contribution margin per direct labor hour of Sarah = $12.80
Contribution margin per direct labor hour of Mike = $8.00
Contribution margin per direct labor hour of Sewing kit = $16.00
Total unitsof Debbie = 50000
Totalunits of Trish = 42000
Total units of Sarah = 35000
Total units of Mike = 40000
Total units of Sewing kit = 325000
Direct labor hour used for one unit of Debbie = 0.40
Direct labor hour used for one unit of Trish = 0.25
Direct labor hour used for one unit of Sarah = 0.70
Direct labor hour used for one unit of Mike = 0.50
Direct labor hour used for one unit of Sewing kit = 0.20
Formula used:
Following formula will be used;
Calculation:
First of all let’s calculate total direct labor hours used for each product
Debbie | Trish | Sarah | Mike | Sewing Kit | |
Direct labor hour used for one unit | 0.40 | 0.25 | 0.70 | 0.50 | 0.20 |
Number of units | 50000 | 42000 | 35000 | 40000 | 325000 |
Total direct labor hours | 20000 | 10500 | 24500 | 20000 | 65000 |
As per above table total direct labor hours are (20000 + 10500 + 24500 + 20000 + 65000) = 140000
But total direct labor hours that can be used are 130000, so company will use direct labor hours to the products those have higher contribution margin.
For getting maximum contribution margin company will use direct labor hours to the products those have higher contribution margin. So let’s calculate highest contribution margin;
Debbie | Trish | Sarah | Mike | Sewing Kit | |
Total direct labor hours used | 20000 | 10500 | 24500 | 20000 | 65000 |
Contribution margin per direct labor hour | $15 | $9.60 | $12.80 | $8 | $16 |
Total contribution margin | $300000 | $100800 | $313600 | $80000 | $1040000 |
Thus total highest contrubution margin will be;
($300000 + $100800 + $313600 + $80000 + $1040000) = $1834400
Thus above calculated is the Highest contribution margin that the company can earn if it makes optimal use of its’ constrained resources.
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Chapter 11 Solutions
Introduction To Managerial Accounting
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