ed CASE 12-32 Make or Buy: Utillzation of a Constrained Resource L012-1, LO12-3, L012-51 Tutstuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the industry. One of the company's products is a heavy-duty corrosion-resistant metal drum, called drum, used to store toxic wastes. Production is constrained by the capacity of an automated machine that is used to make precision welds. A total of 2,000 hours of welding time is availablea on the machine. Because each drum requires 0.4 hours of welding machine time, annual producti imited to 5,000 drums. At present, the welding machine is used exclusively to make the WVDo is annuall accounting department has provided the following financial data concerming the WVD drums WVD Drums The $149.00 Selling price per drum Cost per drum: . . .. . . . . . . $52.10 Direct materials... Direct labor ($18 per hour) . .. . Manufacturing overhead Selling and administrative expense. 29.80 3.60 4.50 29.80 90.00 59.00 Margin per drum . Management believes 6,000 WVD drums could be sold each year if the company had sufficient manufacturing capacity. As an alternative to adding another welding machine, management has con- sidered buying additional drums from an outside supplier. Harcor Industries, Inc., a supplier of quality products, would be able to provide up to 4,000 WVD-type drums per year at a price of $138 per drum. which TufStuff would resell to its customers at its normal selling price after appropriate relabeling Megan Flores, TufStuff's production manager, has suggested that the company could make better use of the welding machine by manufacturing bike frames, which would require only 0.5 hours of welding machine time per frame and yet sell for far more than the drums. Megan believes that TufStuff could sell up to 1,600 bike frames per year to bike manufacturers at a price of $239 each The accounting department has provided the following data concerning the proposed new product