PART 1
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 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 |
225 |
225 |
334 |
Variable costs: |
|||
Direct materials |
195 |
52.10 |
110.80 |
Variable manufacturing overhead |
0 |
1.35 |
1.90 |
Variable selling and administrative |
0.75 |
0.75 |
3.20 |
Total variable cost |
195.75 |
54.20 |
115.90 |
Contribution margin |
29.25 |
170.80 |
218.10 |
PART 3
manufactured |
||
WVD drums |
Bike frames |
|
Contribution margin |
170.80 |
218.10 |
Welding hours per unit |
0.4 |
0.5 |
Contribution margin per welding hour |
427.00 |
436.20 |
PART 4 A
Bike frames manufactured = 1980
WVD Drums manufactured = 3975
WVD Drums purchased = 3400
Part 4 B
Increase in net operating income = $275088.00
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 |
2380 |
|||||
Bike frames produced |
1980 |
218.10 |
0.5 |
760 |
1590 |
431838.00 |
WVD Drums—make |
3975 |
170.80 |
0.4 |
1590 |
0 |
678930.00 |
WVD Drums—buy (7375-3975) |
3400 |
29.25 |
99450.00 |
|||
Total contribution margin |
1210218.00 |
|||||
Less: Contribution margin from present operations: 5475 drums × $170.80 CM per drum |
935130.00 |
|||||
Increased contribution margin and net operating income |
275088.00 |
Quantity of WDV drums = (total welding time – welding time for bike framses)/welding time per unit of WDV drums = (2380-1590)/0.40 =3975
TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used...
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 2,120 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...
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...