Answer the following: (Please show your complete solutions)

• Determine the number of HVM drums (if any) that should be purchased and the number of HVM drums and/or bike frames (if any) that should be manufactured.
• What is the increase in net operating income that would result from this plan over the current operations?

As soon as your analysis was shown to the top management team at CCCI, several managers argued about 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 practice and has always been considered a variable cost of the firm. After all, direct means you can directly trace the cost of the products. If direct labor is not a variable cost, what is?

Another manager argued just as strenuously that direct labor costs should be considered fixed costs of the firm. No one had been laid off in over a decade, and for all practical purposes, everyone at the plant was on a monthly salary. Everyone classified as direct labor works on a regular 40-hour workweek, and overtime has been optional since the company adopted Lean Production techniques. Whether the welding machine is used to make drums or frames, the total payroll would be 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.

The RVRCOB Holdings is a conglomerate that operates in multiple industries. Each firm it owns established a foothold and is among the leading players in the field. For the period, 3 of its major firms require study and major decisions, your Consultancy Services are engaged for: 1. Caryl Crates \& Containers, Inc. (CCCI) 2. N \& M Company 3. Fruitas Inc Caryl Crates \& Containers, Inc. (CCCI) The firm sells a wide range of containers that are used in the chemical and laboratory industry. One of the company's products is a heavy-duty corrosion-resistant metal drum, called the HVM drum is used to store hazardous volatile materials (HVM) considered toxic wastes. Utilization of a Constrained Resource; Make or Buy Production of the HVM drum is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,000 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding time, annual production is limited to 5,000 drums. At present, the welding machine is used exclusively to make the HVM drum. The Accounting Department has provided the following financial data concerning the HVM drum: Management believes 6,000 HVM 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. Container Distributors Inc., a supplier of quality products, would be able to provide 4,000 HVM-type drums per year for $7,621 per drum, which CCCl would resell to its customers at its normal selling after appropriate relabeling. Conchita Corazon, CCCl's production manager, has suggested that the company could make better use of the welding machine by manufacturing classic-elite bike frames, which would require only 0.5 hours of welding time per frame and yet sell for far more than the drums. Conchita believes that CCCI could sell up to 1,600 classic-elite bike frames per year to bike manufacturers for 13,112 each. The Accounting Department has provided the following data concerning the proposed new product: The classic-elite bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to the products based on 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 $73.75 per drum and $97.50 per bike frame. The variable manufaring overhead cost would not be incurred on drums acquired from an outside supplier. Selling and administrative expenses are allocated to the products based on 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 48.70 per drum and 77.10 per bike frame. All of the firm'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