Question

TufStuff Inc sells a wide range of drums, beans, boxes, and other containers that are used in the chemical industry . One of the companies products is a heavy duty corrosion resistant metal drum, called the WBD drum, used to store toxic waste. Production is constrained by the capacity of an automated welding machine that is used to make precision welding. A total of 21:00 of welding time is available annually on the machine. Because each drum requires .8 hours of welding machine time, annual production is limited to 2625 drums. At present, the welding machine is used exclusively to One of the companies products is a heavy duty corrosion resistant metal drum, called the WVD Graham, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision well. A total of 21:00 of welding time is available annually on the machine. Because each drum requires .8 hours of welding machine time, annual production is limited to 2625 drums. At present, the welding machine is used exclusively to me make the WVD drums. The accounting department has provided the following financial data concerning the WVD. Management believe is 3125 WVD drones to be sold each year if the company had sufficient manufacturing capacity. As an alternative to adding another welding machine, management has considered buying additional drainage from an outside supplier. Hard-core industries a supplier quality products, would be able to provide up to 1800 WED type drums per year and the price of $140 per drum, which tough stuff what we sell to its customers at its normal selling price after appropriate relabeling. Management believes 3125 WVD drones to be sold each year if the company had sufficient manufacturing capacity. As an alternative to adding another welding machine, management has considered buying additional drones from an outside supplier. Harcor industries a supplier of quality products, would be able to provide up to 1800 WVD type drums per year and a price of $140 per drum, which TufStuff would resell to its customers at its normal selling price after appropriate relabeling. Megan Florez, tough stuff’s production manager, has suggested that the company could make better use of the welding machine by manufacturing bike frames, which will require only point to where is the welding machine time per frame and yet so far more than the drums. Making believes of the tough stuff could sell it for 3600 bike frames per year to bake a manufacturers at a price of $76 each. The accounting apartment has provided the following data concerning the proposed new product: Megan Florez, tough staffs production manager, has suggested that the company could make better use of the welding machine and manufacturing bike frames, which will require only .2 hours of welding machine time per frame and it still Farmor then the drums. Mefsb believes that the tough stuff could sell it for 3600 bike range per year to bike manufacturers at a price of $76 each. The accounting apartment has provided the following data concerning the proposed new product: 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, or some of it is variable. The variable manufacturing overhead has been estimated at $1.23 per WV Deidre and $2.40 4 The variable manufacturing overhead has been estimated $1.23 per W and $2.40 per bike. Infection overhead costs would not be incurred on drums occurred from outside supplier. Selling any ministry expenses are allocated to products on the basis of revenues. Almost all of the ceiling in ministry of expenses are fixed, costs, but it has been estimated that way expenses amount to $1.03 per WVD drum whether made or ourchased and would be $2.20 per bike frame. all of the companies employees direct and indirect or paid for full 40 hour work weeks in the company has a policy of laying off workers only in major recession. Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the WVD drums and bike frames?

Answer 1

NO

It is suggested that the calculations of product margins by the accounting department for the drums and bike frames should not be applied 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.