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:

HVM Drums
Selling Price per drum...		P 8,195.00
Cost per drum:
Direct Materials .....	P 2,851.80
Direct Labor (P69.00 per hour)	195.80
Manufacturing Overhead .........	245.80
Total unit manufacturing costs.	P3,294.40
Unit Marketing & Admin Costs ...	1,622.60	4,917.00
Margin per drum ......		3,278.00

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 P 7,621 per drum, which CCCI would resell to its customers at its normal selling after appropriate relabeling.

Conchita Corazon, CCCI'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 P 13,112 each.

The Accounting Department has provided the following data concerning the proposed new product:

HVM Drums
Selling Price per frame....		P 13,112.00
Cost per frame:
Direct Materials .....	P 5,420.00
Direct Labor (P69.00 per hour)	1,600.00
Manufacturing Overhead......	1,950.00
Total unit manufacturing costs	P8,970.00
Unit Marketing & Admin Costs..	2,570.00	11,540.00
Margin per drum ...		$ 1,572.00

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 P 73.75 per drum and P 97.50 per bike frame. The variable manufacturing 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 P 48.70 per drum and P 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.

Required 1. Given the margins of the two products as indicated in the information provided by the Accounting Department, does it make sense to consider producing the bike frames? Explain.

1. Using the Theory of Cost Behavior, explain the nature of the costs involved in producing HVM Drums and Classic-Elite Bike Frames.
2. In this case, is direct labor considered fixed or variable? Cite the pieces of evidence found in the case to support your answer and explain.

Use 5 decimal places for interim computations. Round-off final answers to two decimal places

Required 2. Compute the contribution margin per unit for:

Purchased HVM Drums

1. Manufactured HVM Drums
2. Manufactured Classic-Elite Bike Frames