Case 13-32 (Algo) Make or Buy Decisions; Volume Trade-Off Decislons [LO13-1, LO13-3, LO13-5] TufStuff, lncorporsted, sels s wide rsnge of drums, bins, boxss, ond ather conteiners that are used in the chemizal industry. One of the canstreined by the capsety of an outamated we ding machine that is used to moke preclion we ds. A total of 2,200 hours of weiding time is ave obie annusly on the machlne. Eecsuse esch drum requires 0.4 haurs of weiding machine time, annusl production ls Iimied to 5,500 drums. At present, the we ding mochine ls used excl usvely to moke the Wvo drums. The sccounting depsrtment has prowided the follawing firancisi cots conceming the Wvo drums: Manggement beleves 7,150 Wvo drums could be sold esch yess lf the compsny had sufficient monufiscturing copscity. As sn aleernative to odding another weloing mschine, mansgement has considered buying additionsi drums from an oustide supplier. Harcor Industres, lncorparsted, a supplier of qualty producta, would be sble to provide up to 4,500 WvD type drumt per year at a price of $168 per drum, which TufStuff would reiell to its customers st ts nommal selling price sfer sppropriate relabeling. Megon Florez, Turituff : produttion mensger, has suggested that the compsny could moke bewer use of the welding machine by manufocturing bike frames, which would require only 0.5 hours of we ding mochine time per frame snd yet sell for tar more than the drums. Megsn beileves that Turitutuf could sell up to 1,800 bike fromes per year to bike mon ufocturers at o prise of $299 esch. The occounting deportment hos pravided the following dets conceming the proposed new product. The bike frames could be produced with exvisting equ/pment snd perzonnel. Manufscturing overhesd is allocsted to products on the bosis of direct lobor-hourz. Moct of the monufacturing overhesd conslats af fuxed common coats such ss rent on the foctory bullaling. but some of it is vsriable. The varisble manufacturing overhesd has been estimsted at $1.35 per WVD drum and $1.90 per bike frame. The varisble manufacturing overhesd cost would not be incurred on drums scquired from the outside supplier. Seling ond aciministrative expenses are alocsted to products an the basis of revenuez. Almost al af the selling and siministrotve expenses are fixed common costa, but th has been estmated that verisbie selling snd sdmin strathe expenses smount to $.75 per WV drum whether mode or purchased and would be $2.30 per ble fisme. All of the compony's emplayees-direct and indirect-are poid for full 40.00 -hour work weeks snd the compony hos s policy of laying aff warkers only in mojor recessions. A soon ss your anslysla wes shown to the top manegement teem st TufStufi, several mansgers gat into an argument concerning haw direct labor costs should be trested when moking this decision. One msneger argued that alrect iabor is slways treated as a veriable cost in textboolks and in practice snd has alweys been considered s varlabe cost at Tuibtuff. After sll, "direct" mesns you can directly, trace the cost to products. If dlrect labor is not a verisble cost, whst is?" Another mansger srgued just as strenuously that dliect isbor shoud be consicered a fixed coat at Tuibtuffi No one hod been lasid off in over s decode, and for al proctical purposea, everyone at the plsnt is an a monthly salary. Everyone classified as direct isbor works a regular 40.00 hour workweek and overt me has not been nesessary since the compony sdopted Lesn Production techniquea. Whether the welaing machine ls used to moke drums or fromes, the totsl psyrall would be exsctly the same. There is enough slsck, in the form of idle tme, to accommodste sny incresse in totsl direct lobor time that the bike frames would require. Required: 1. Would you be camiortable reying on the fingneial dits provided by the sccounting department for making declaions relsted to the WV druma and bike frames? 2 Compute the contribution mergin per unt [assume direct lobor is a ficed cost] 3. Compute the contrioution margin per welding hour [assume direct labor la s fixed coct] 4. Assuming direct labor la s fixed cost a. Determine the number of WVD drums (f sny) that should be purchased and the number of WVD drums snd ar bile firmes (f sny) that should be monufsctured. b. What is the incresse (decresse) in net operoting income that would resut from this plan over current operstors? 5. Campute the contribution margin per unt [assume direct lobor is a varisble coxt] 6. Campure the contribution morgh per weleing hour. [acsume direct lobor is a verisbie cost] 7. Assuming direct lsbor la a verigale cost a. Determine the number of WVD drums (f sny/ that should be purchased and the number of WVD drums snd ar ble fismes (f sny) that should be manufsctured. b. What is the incresse (decresse) in net operoting income that would resut from this plan over current operstors? Complete this question by entering your answers in the tabs below. What k the increase (decresse) in net apersting income thst would result from this plan ower cument aperstions? (Acsume dirent labor is a variable matt) (Do not mund intermectiate caliulations.)