Question

Hi, I submitted this question before, but it wasn't actually answered. I figured out 1 and 2, but can you try the rest? I am unsure how to solve it.

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 2,500 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 3,125 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:

WVD Drums
Selling price per drum		$	158.00
Cost per drum:
Direct materials	$45.60
Direct labor ($18 per hour)	4.50
Manufacturing overhead	4.25
Selling and administrative expense	16.50		70.85
Margin per drum		$	87.15

Management believes 3,625 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 2,000 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 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 4,000 bike frames per year to bike manufacturers at a price of $70 each. The accounting department has provided the following data concerning the proposed new product:

Bike Frames
Selling price per frame		$	70.00
Cost per frame:
Direct materials	$18.60
Direct labor ($18 per hour)	22.50
Manufacturing overhead	16.85
Selling and administrative expense	7.60		65.55
Margin per frame		$	4.45

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 $1.16 per WVD drum and $1.70 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 $0.96 per WVD drum whether made or purchased and would be $1.50 per bike frame.

All of the company’s employees—direct and indirect—are paid for full 40-hour workweeks and the company has a policy of laying off workers only in major recessions.

Required:

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?

	Yes
	No

2. Compute the contribution margin per unit for [assume direct labor is a fixed cost]: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

3. As soon as your analysis was shown to the top management team at TufStuff, several managers got into an argument concerning how direct labor costs should be treated when making this decision. One manager argued that direct labor is always treated as a variable cost in textbooks and in practice and has always been considered a variable cost at TufStuff. After all, “direct” means you can directly trace the cost to products. “If direct labor is not a variable cost, what is?” Another manager argued just as strenuously that direct labor should be considered a fixed cost at TufStuff. No one had been laid off in over a decade, and for all practical purposes, everyone at the plant is on a monthly salary. Everyone classified as direct labor works a regular 40-hour workweek and overtime has not been necessary since the company adopted Lean Production techniques. Whether the welding machine is used to make drums or frames, the total payroll would be exactly the same. There is enough slack, in the form of idle time, to accommodate any increase in total direct labor time that the bike frames would require.

a. Compute the contribution margin per welding hour for [assume direct labor is a fixed cost]: (Round your final answers to 2 decimal places.)

b. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured. [Assume direct labor is a fixed cost]

c. What is the increase in net operating income that would result from this plan over current operations? (Do not round intermediate calculations.)

4. Redo requirements (2) and (3) making the opposite assumption about direct labor from the one you originally made. In other words, if you treated direct labor as a variable cost, redo the analysis treating it as a fixed cost. If you treated direct labor as a fixed cost, redo the analysis treating it as a variable cost.

a. Compute the contribution margin per unit for [assume direct labor is a variable cost]: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Compute the contribution margin per welding hour for [assume direct labor is a variable cost]: (Round your final answers to 2 decimal places.)

c. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured. [Assume direct labor is a variable cost]

d. What is the increase in net operating income that would result from this plan over current operations? (Do not round intermediate calculations.)

Answer 1

Solution 1	Yes , I am comfortable with the Data Provided by the Accounts department for making Decision but Fixed cost will not be included in decision making as it is sunk and will not be considered for decision making.
Solution 2	Calculation of Contribution
	Particulars	WVD DRUMS	FRAME BIKES	ON ACQUIRED DRUMS
	SALE PRICE	158	70	158
	LESS: VARIABLE COST
	Direct Material	45.6	18.6	150
	Labour*	0	0	0
	Variable Overhead	1.16	1.7	0
	Variable Selling	0.96	1.5	0.96
	Contribution per unit	110.28	48.2	7.04
	* Since Labour Cost is Fixed, it is not considered for the calculation of contribution.
Solution 3
a)	Calculation of Contribution per welding hour
	Particulars	WVD DRUMS	FRAME BIKES
	A) Contribution per unit	110.28	48.2
	B) Labour Hour Per unit	0.8	0.2
	Contribution per welding hour (A/B)	137.85	241
	Ranking	2	1
b)	Here, we need to make decision whether we should make bike frames or WVD Drums.
	We will decide this on the basis of Contribution per Weldinh machine hours.
	Since, Contribution per welding hour is more of Frame Bikes , we will manufacture it first and if any capacity is still remaining, then will manufacture WVD bikes
	Particulars	Hours per unit	units produced	Total Hours Used
	Frame Bikes	0.2	4000	800
	WVB Drums	0.8	2125	1700
	Total Hours			2500
	Here, 1700 hours is balancing Figure. Since only 4000 units can be sold of Frame Bikes which require 800 hours only , the remining hours will be used for the drums.
	Also, Since total WVD Drums that can be sold are 3625, we will buy 1500 WVD Drums(3625-2125)
c)	Existing Profit
	Particulars	Units	Per unit	Total
	Revenue	3125	158	493750
	Cost
	Direct materials	3125	45.6	142500
	Direct labor ($18 per hour)	3125	4.5	14062.5
	Manufacturing overhead	3125	4.25	13281.25
	Selling and administrative expense	3125	16.5	51562.5
	Net Income			272343.75
	New Profit
	Particulars	WVD DRUMS	FRAME BIKES	ON ACQUIRED DRUMS	Total
	No of units	2125	4000	1500
	Contribution per Unit	110.28	48.2	7.04
	Total Contribution	234345	192800	10560	437705
	Less: Fixed Manufacturing Cost**				9656.25
	Less Fixed Selling and Admin Cost***				48562.5
	Less: Fixed Labour cost****				14062.5
	Net Income				365423.8
	** Calculation of Fixed Manufacturing Cost
	Total Manufacturing Cost as per old profit sheet		13281.25
	Less: Variable cost (3125*1.16)		3625
	Fixed cost		9656.25
	** *Calculation of Fixed Selling Cost
	Total Selling Cost as per old profit sheet		51562.5
	Less: Variable cost (3125*0.96)		3000
	Fixed cost		48562.5
	*** Calculation of Labour Cost (3125*4.5)		14062.5
	Net Increase in Profit = 365423.8-272343.75	93080.05