Question

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 machine time, annual production is limited to 3,000 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums: $ 170.00 WVD Drums Selling price per drum Cost per drum: Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense $46.60 4.50 5.25 17.50 73.85 Margin per drum $ 96.15 Management believes 3,500 WVD drums could be sold each year if the company had sufficient manufacturing capacity. As an alternative to adding another welding machine, management has considered buying additional drums from an outside supplier. Harcor Industries, Inc., a supplier of quality products, would be able to provide up to 1,500 WVD-type drums per year at a price of $130 per drum, which TufStuff would resell to its customers at its normal selling price after appropriate relabeling. Megan Flores, TufStuff's production manager, has suggested that the company could make better use of the welding machine by manufacturing bike frames, which would require only 0.2 hours of welding machine time per frame and yet sell for far more than the drums. Megan believes that TufStuff could sell up to 3,900 bike frames per year to bike manufacturers at a price of $75 each. The accounting department has provided the following data concerning the proposed new product: $ 75.00 Bike Frames Selling price per frame Cost per frame: Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense $19.60 22.50 17.85 8.60 68.55 Margin per frame $ 6.45

Answer 1

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Tufstuff Inc.

Answer 1

Yes all the cost data and input usage data like welding hours and direct labor is provided. So we can rely on the information.

Answer 2	Purchase Drums	Manufacture Drums	Manufacture Bike Frames	Note
Sell price	170.00	170.00	75.00	A
Less: Variable costs
Purchase Price	130.00
Direct Material		46.60	19.60
Manufacturing overhead		1.26	2.70
Selling & Admin	1.06	1.06	2.50
Total Variable costs	131.06	48.92	24.80	B
Contribution per unit	38.94	121.08	50.20	C=A-B

Answer 3 a	Manufacture Drums	Manufacture Bike Frames	Note
Contribution per unit	121.08	50.20	See C
Welding hour per unit	0.80	0.20	D
Contribution per Welding hour	151.35	251.00	E=C/D

Answer 3 b

Contribution per Welding hour of Bike Frames is higher than Drums. So entire demand of Bike frames should be full filled first then remaining welding hours should be used for Drums. Remaining demand of drums should be fulfilled by buying it from outside supplier.

Welding hour per unit of Bike Frames	0.20	F
Demand of Bike Frames	3,900.00	G
Welding hour used for Bike Frames	780.00	H=F*G
Total welding hours available	2,400.00	I
Welding hours remaining	1,620.00	J=I-H
Welding hour per unit of drums	0.80	K
Drums manufactured	2,025.00	L=J/K
Annual demand for drums	3,500.00	M
Drums to be purchased from supplier	1,475.00	N=M-L

Workings for Answer 3 c		Note
Calculation of fixed costs	Bike Frames
Annual production	3,900.00	O
Direct labor cost per unit	22.50	P
Fixed labor cost	87,750.00	Q=O*P
Manufacturing overhead	17.85
Less: Variable Manufacturing overhead	2.70
Fixed Manufacturing overhead per unit	15.15	R
Total Fixed Manufacturing overhead	59,085.00	S=O*R
Selling & Admin	8.60
Less: Selling & Admin	2.50
Fixed Selling & Admin per unit	6.10	T
Total Fixed Selling & Admin	23,790.00	U=O*T
Current Net Income	Amount $
Drums sold	3,000.00
Margin per drum	96.15	V
Current Net Income	288,450.00	W=O*V

Revised Net Income	Purchase Drums	Manufacture Drums	Manufacture Bike Frames	Total	Note
Units sold	1,475.00	2,025.00	3,900.00		X
Contribution per unit	38.94	121.08	50.20		Y
Total Contribution	57,436.50	245,187.00	195,780.00	498,403.50	Z=X*Y
Less: Fixed costs
Fixed labor cost				87,750.00	See Q
Total Fixed Manufacturing overhead				59,085.00	See S
Total Fixed Selling & Admin				23,790.00	See U
Total Fixed costs				170,625.00	AA=Q+S+U
Revised Net Income	57,436.50	245,187.00	195,780.00	327,778.50	AB=Z-AA
Increase in net income				39,328.50	AC=AB-W

Answer 4 a	Purchase Drums	Manufacture Drums	Manufacture Bike Frames	Note
Sell price	170.00	170.00	75.00	See A
Less: Variable costs
Purchase Price	130.00
Direct Material		46.60	19.60
Direct Labor		4.50	22.50
Manufacturing overhead		1.26	2.70
Selling & Admin	1.06	1.06	2.50
Total Variable costs	131.06	53.42	47.30	AD
Contribution per unit	38.94	116.58	27.70	AE=A-D

Answer 4 b	Manufacture Drums	Manufacture Bike Frames	Note
Contribution per unit	116.58	27.70	See AE
Welding hour per unit	0.80	0.20	See D
Contribution per Welding hour	145.73	138.50	AF=AE/D