Question

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TurStuff, 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 2,080 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding machine time, annual production is limited to 5,100 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: $52.10 WVD Drums Selling price per drum Cost per drum Direct materials Direct labor $22 per hour) Manufacturing overhead Selling and administrative expense Margin per drum Management believes 6,100 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 4.100 WVD-type drums per year at a price of $150 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 the company could make better use of the welding machine by manufacturing bike frames, which would require only 0.5 hours of welding machine time per frame and yet sell for far more than the drums, Megan believes that TufStuff could sell up to 1,680 bike frames per year to bike manufacturers at a price of $259 each. The accounting department has provided the following data concerning the proposed new product Bike Frames Selling price per fram Cost per tramet Direct materials Direct labor ($10 per hour) Manufacturing overhead Selling and administrative expense Margin per frame 31.00 The bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on the basis of direct labor-hours. Most of the manufacturing overhead consists of fixed common costs such as rent on the factory building. but some of it is variable. The variable manufacturing overhead has been estimated at $1.35 per WVD drum and $1.90 per bike frame The variable manufacturing overhead cost would not be incurred on drums acquired from the outside supplier Selling and administrative expenses are allocated to products on the basis of revenues. Almost all of the selling and administrative expenses are fixed common costs, but it has been estimated that variable selling and administrative expenses amount to $0.75 per WVD drum whether made or purchased and would be $1.70 per bike frame. All of the company's employees direct and indirect-are paid for full 40.00 hour work weeks and the company has a policy of laying off workers only in major recessions

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first four parts of the question should be answered. Kindly take note of it.

Part 1

Answer is NO

The product margins computed by the accounting department for the drums and bike frames should not be used in the decision of whether to produce WVD drums or bike frames. Due to the presence of allocated fixed common costs, the product margins are lower than they should be so they are irrelevant in this decision. Moreover, the profitability of the two products in relation to the amount of the constrained resource-welding time, should also be considered. In nutshell, the financial data offered by the accounting department does not seem to be important for making this decision.

Part 2

assuming direct labor is fixed

		manufactured
	Purchased WVD drums	WVD drums	Bike frames
Selling price	165	165	259
Variable costs:
Direct materials	150	52.10	101.80
Variable manufacturing overhead	0	1.35	1.90
Variable selling and administrative	0.75	0.75	1.70
Total variable cost	150.75	54.20	105.40
Contribution margin	$14.25	$110.80	$153.60

PART 3

	manufactured
	WVD drums	Bike frames
Contribution margin	$110.80	$153.60
Welding hours per unit	0.4	0.5
Contribution margin per welding hour	$277.00	$307.20

Part 4 a

Bike frames manufactured = 1840

WVD Drums manufactured = 3300

WVD Drums purchased = 3900

Part 4 B

Increase in net operating income = $79198.00

	Quantity (A)	Unit Contri-bution Margin (B)	Welding Time per Unit (C)	Total Welding Time (AXC)	Balance of Welding Time	Total Contri-bution (AXB)
Total hours available					2080
Bike frames produced	1680	153.60	0.5	840	1240	258048.00
WVD Drums—make	3100	110.80	0.4	1240	0	343480.00
WVD Drums—buy (6100-3100)	3000	14.25				42750.00
Total contribution margin						644278.00
Less: Contribution margin from present operations: 5100 drums × $110.80 CM per drum						565080.00
Increased contribution margin and net operating income						$79198.00

Quantity of WDV drums = (total welding time – welding time for bike framses)/welding time per unit of WDV drums = (2420-1010)/0.40 =3525