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Canisters Inc. sells a wide variety of drums, bins, boxes and other containers that are used in the chemical industry. One of the company's products
Canisters Inc. sells a wide variety 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 WD drum used to store toxic waste. | |||||||||||||||
Production is constrained by the capacity of an automated welding machine, which has a maximum capacity of | 2,000 | ||||||||||||||
hours of welding time available. | |||||||||||||||
Each drum requires | 0.40 | hour of welding time, and production is currently maximized. At present, the welding machine is | |||||||||||||
used exclusively to make WD drums. The accounting department has provided the following financial data concerning WD drums: | |||||||||||||||
WD Drums | |||||||||||||||
Selling price per drum | $ 149.00 | ||||||||||||||
Cost per drum | |||||||||||||||
Direct Materials | 52.10 | ||||||||||||||
Direct Labor | 3.60 | ||||||||||||||
($18/hour) | |||||||||||||||
Manufacturing Overhead | 4.50 | ||||||||||||||
Selling and Admin. | 29.80 | 90.00 | |||||||||||||
Margin per drum | $ 59.00 | ||||||||||||||
Management believes that a total of | 6,000 | WD drums could be sold each year if the company had sufficient capacity. | |||||||||||||
As an alternative to adding another welding machine, management has considered buying additional drums from an outside supplier, Beater Industries. | |||||||||||||||
Beater would be able to provide up to | 4,000 | WD type drums per year at a price of | 138 | per drum, which Canisters would resell at its normal sales price after labeling. | |||||||||||
Meliha Cicek, production manager, has suggested that the company could make better use of the welding machine by manufacturing bike frames, which would require only | 0.50 | hours | |||||||||||||
of welding time per frame and yet sell for far more than drums. Meliha believes that Canisters could sell | 1,600 | bike frames per year to manufacturers at a price of | 239 | each | |||||||||||
The accounting department has provided the following data concerning proposed product: | |||||||||||||||
Bike Frames | |||||||||||||||
Selling price per frame | $ 239.00 | ||||||||||||||
Cost per frame | |||||||||||||||
Direct Materials | $ 99.40 | ||||||||||||||
Direct Labor | $ 28.80 | ||||||||||||||
($18/hour) | |||||||||||||||
Manufacturing Overhead | $ 36.00 | ||||||||||||||
Selling and Admin. | $ 47.80 | $ 212.00 | |||||||||||||
Margin per frame | $ 27.00 | ||||||||||||||
The bike frames could be produced with existing equipment and personnel. | |||||||||||||||
Manufacturing overhead is allocated to products on the basis of 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 WD drum and | 1.90 | 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 the 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 drum whether made or purchased and would be | 1.30 | per 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. | |||||||||||||||
1. Compute the impacts and recommend to management which strategy would result in the highest profits to Drummond. | |||||||||||||||
Requirement 1: Make or buy the drums (or some combination - this is sheet 2) | |||||||||||||||
Requirement 2: Produce only the bike frames (sheet 3) | |||||||||||||||
Requirement 3: Make/buy combination of drums and frames (sheet 4) | |||||||||||||||
2. What non-quantifiable factors should be considered and why? | |||||||||||||||
Requirement 4: Write a conclusion for management (sheet 5) | |||||||||||||||
SET UP YOUR EXCELWORKBOOK AS FOLLOWS: | |||||||||||||||
Sheet 1: Inputs (this sheet) | |||||||||||||||
Sheet 2: Relevant costs - Make drums or buy drums (or some combination) | |||||||||||||||
Sheet 3: Produce only bike frames | |||||||||||||||
Sheet 4: Combination of alternatives, what is best course of action for company. How many drums and/or bike frames should the company make or buy? | |||||||||||||||
Sheet 5: Written conclusion (letter to management identifying what Canisters should do) and non-quantifiable factors | |||||||||||||||
Be sure to reference your numbers computed on sheets 2 through 4 in your conclusion. | |||||||||||||||
Please submit your work under assignments in Canvas and name your file with the last names of your partners. For example, Smith_Jones.xls Only one group member should submit the analysis. |
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