Solution 1:
No, the Product margin as computed by accounting Department should not be used to make decision because it has considered allocated fixed costs also and fixed costs are irrelevant for such decisions. Variable costs should be considered while decision making.
Solution 2: | |||
Computation of Contribution margin per unit (Assuming Direct Labor is Fixed cost) | |||
Manufactured | |||
Purchased WVD drums | WVD drums | Bike frames | |
Selling price | $241.00 | $241.00 | $354.00 |
Variable costs: | |||
Direct materials | $207.00 | $52.10 | $113.20 |
Variable manufacturing overhead | $0.00 | $1.35 | $1.90 |
Variable selling and administrative | $0.75 | $0.75 | $3.60 |
Total variable cost | 207.75 | 54.2 | $118.70 |
Contribution margin per unit | $33.25 | $186.80 | $235.30 |
Solution 3: | |||
Computation of Contribution margin per welding hour | |||
Manufactured | |||
WVD drums | Bike frames | ||
Contribution margin per unit | $186.80 | $235.30 | |
Welding hours per unit | 0.4 | 0.5 | |
Contribution margin per welding hour | $467.00 | $470.60 | |
Ranking | 2 | 1 | |
Solution 4a: | |||
Compuation of WVD drums and/or bike frames to be manufactured/ purchased | |||
Hours Required | Hours Left | ||
First Manufacture Bike Frames (2060*0.5 hour) | 1030 | 1430 | |
Hours to Manufacture WVD Drums | 1430 | 0 | |
Units | |||
Manufacture Bike frames | 2060 | ||
Manufacture WVD Drums (1260/ 0.4) | 3575 | ||
Purchase WVD Drums (7475 - 3575) | 3900 | ||
Solution 4b: | |||
Computation of Net Operating Income resulting from this plan over current operations | |||
Units | CM per unit | Total CM | |
Bike Frames | 2060 | $235.30 | $4,84,718 |
WVD Drums (Manufactured) | 3575 | $186.80 | $6,67,810 |
WVD Drums (Purchased) | 3900 | $33.25 | $1,29,675 |
Total Contribution margin from New Plan | $12,82,203 | ||
Less: Contribution margin from Current operations (5575*$186.80) | $10,41,410 | ||
Increase in Net Operating Income | $2,40,793 | ||
Solution 5: | |||
Computation of Contribution margin per unit (Assuming Direct Labor is Variable cost) | |||
Manufactured | |||
Purchased WVD drums | WVD drums | Bike frames | |
Selling price | $241.00 | $241.00 | $354.00 |
Variable costs: | |||
Direct materials | $207.00 | $52.10 | $113.20 |
Direct labor | $0.00 | $8.20 | $65.60 |
Variable manufacturing overhead | $0.00 | $1.35 | $1.90 |
Variable selling and administrative | $0.75 | $0.75 | $3.60 |
Total variable cost | $207.75 | $62.40 | $184.30 |
Contribution margin per unit | $33.25 | $178.60 | $169.70 |
Solution 6: | |||
Computation of Contribution margin per welding hour | |||
Manufactured | |||
WVD drums | Bike frames | ||
Contribution margin per unit | $178.60 | $169.70 | |
Welding hours per unit | 0.4 | 0.5 | |
Contribution margin per welding hour | $446.50 | $339.40 | |
Ranking | 1 | 2 | |
Solution 7a: | |||
Compuation of WVD drums and/or bike frames to be manufactured/ purchased | |||
Hours Required | Hours Left | ||
First Manufacture WDV Drums (6150*0.4 hour) | 2460 | 0 | |
Hours to Manufacture Bike frames | 0 | 0 | |
Units | |||
Manufacture WVD Drums | 6150 | ||
Purchase WVD Drums (7475 - 6150) | 1325 | ||
Solution 7b: | |||
Computation of Net Operating Income resulting from this plan over current operations | |||
Units | CM per unit | Total CM | |
WVD Drums (Manufactured) | 6150 | $178.60 | $10,98,390 |
WVD Drums (Purchased) | 1325 | $33.25 | $44,056 |
Total Contribution margin from New Plan | $11,42,446 | ||
Less: Contribution margin from Current operations (5575*$178.60) | $9,95,695 | ||
Increase in Net Operating Income | $1,46,751 |
Tuf Stuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are...
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company's products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,380 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding...
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,220 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding...
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,140 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding...
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,420 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding...
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,200 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding...
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,100 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding...
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,480 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding...
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,200 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding...
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,200 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding...
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company's products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,400 hours of welding time is available annually on the machine. Because each drum requires 0.8 hours of welding...