Caryl Crates & Containers, Inc. $($CCCl$)$ 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 $0\mathrm{.}4$ 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$8,195\mathrm{.}00$

Cost per drum:

Direct Materials

P$2,851\mathrm{.}80$

Direct Labor $($P$69\mathrm{.}00$ per hour$)............196\mathrm{.}80$

Manufacturing Overhead $...............245\mathrm{.}80$

Total Unit Manufacturing Costs $.........$P$3,294\mathrm{.}40$

Unit Marketing and Admin Costs $.......1,622\mathrm{.}60$

$4,{917\mathrm{.}00}_{?}$

Margin Per Drum

P$3,278\mathrm{.}00$

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 $P7,621$ 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 $0\mathrm{.}5$ 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 $P13,112$ each.

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

HVM Drums: Proposed New Product $($Classic Elite Bike Frames$)$

Selling Price per frame

P$13,112\mathrm{.}00$

Less: Cost per frame:

Direct Materials

P$5,420\mathrm{.}00$

Direct Labor $($P$69\mathrm{.}00$ per hour$)$

$1,600,00$

Manufacturing Overhead $......................1,950,00$

Total unit manufacturing costs $.......................$ P $8,970\mathrm{.}00$

Unit Marketing & Admin Costs $......................\mathrm{.}2,2\mathrm{.}570\mathrm{.}00$

$11\mathrm{.}540\mathrm{.}00$

Margin per drum

P $1\mathrm{.}572\mathrm{.}00$

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 $P73\mathrm{.}75$ per drum and $P97\mathrm{.}50$ 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 $P48\mathrm{.}70$ per drum and $P77\mathrm{.}10$ 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.

Using the Theory of Cost Behavior, explain the nature of the costs involved in

producing HVM Drums and Classic$-$Elite Bike Frames.

Is my answer correct? It does NOT make sense for $($CCCl$)$ to consider producing

the classic$-$elite bike frames since the margin per classic elite bike frame

$(P1,572\mathrm{.}00)$ is significantly LOWER than the margin per HVM drum $($P$3,278\mathrm{.}00).$