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TufStuff, Incorporated, sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the companys products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,280 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding machine time, annual production is limited to 5,700 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums:
WVD Drums Selling price per drum $ 205.00 Cost per drum: Direct materials $ 52.10 Direct labor ($32 per hour) 6.40 Manufacturing overhead 12.90 Selling and administrative expense 32.60 104.00 Margin per drum $ 101.00
Management believes 7,250 WVD 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. Harcor Industries, Incorporated, a supplier of quality products, would be able to provide up to 4,700 WVD-type drums per year at a price of $180 per drum, which TufStuff would resell to its customers at its normal selling price after appropriate relabeling.
Megan Flores, TufStuffs 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 1,880 bike frames per year to bike manufacturers at a price of $309 each. The accounting department has provided the following data concerning the proposed new product:
Bike Frames Selling price per frame $ 309.00 Cost per frame: Direct materials $ 107.80 Direct labor ($18 per hour) 51.20 Manufacturing overhead 50.00 Selling and administrative expense 59.00 268.00 Margin per frame $ 41.00
The bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on the basis of 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 $1.35 per WVD drum and $1.90 per bike frame. 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 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 $.75 per WVD drum whether made or purchased and would be $2.70 per bike frame.
All of the companys employeesdirect and indirectare paid for full 40.00-hour work weeks and the company has a policy of laying off workers only in major recessions.
As soon as your analysis was shown to the top management team at TufStuff, several managers got into an argument concerning how direct labor costs should be treated when making this decision. One manager argued that direct labor is always treated as a variable cost in textbooks and in practice and has always been considered a variable cost at TufStuff. After all, direct means you can directly trace the cost to products. If direct labor is not a variable cost, what is? Another manager argued just as strenuously that direct labor should be considered a fixed cost at TufStuff. No one had been laid off in over a decade, and for all practical purposes, everyone at the plant is on a monthly salary. Everyone classified as direct labor works a regular 40.00-hour workweek and overtime has not been necessary since the company adopted Lean Production techniques. Whether the welding machine is used to make drums or frames, the total payroll would be exactly the same. There is enough slack, in the form of idle time, to accommodate any increase in total direct labor time that the bike frames would require.
Required:
1. Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the WVD drums and bike frames?
2. Compute the contribution margin per unit. [assume direct labor is a fixed cost]
3. Compute the contribution margin per welding hour. [assume direct labor is a fixed cost]
4. Assuming direct labor is a fixed cost:
a. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured.
b. What is the increase (decrease) in net operating income that would result from this plan over current operations?
5. Compute the contribution margin per unit. [assume direct labor is a variable cost]
6. Compute the contribution margin per welding hour. [assume direct labor is a variable cost]
7. Assuming direct labor is a variable cost:
a. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured.
b. What is the increase (decrease) in net operating income that would result from this plan over current operations?
TufStuff, Incorporated, sells a wide range 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 WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,280 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding machine time, annual production is limited to 5,700 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums: Management believes 7,250 WVD 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. Harcor Industries, Incorporated, a supplier of quality products, would be able to provide up to 4,700 WVD-type drums per year at a price of $180 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 1,880 bike frames per year to bike mahufacturers at a price of $309 each. The accounting department has provided the following data concerning the proposed new product: The bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on the basis of 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 $1.35 per WVD drum and $1.90 per bike frame, 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 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 $.75 per WVD drum whether made or Durchased and would be $2.70 Der bike frame. All of the company's employees-direct and indirect-are paid for full 40.00-hour work weeks and the company has a policy of laying off workers only in major recessions. As soon as your analysis was shown to the top management team at TufStuff, several managers got into an argument concerning how direct labor costs should be treated when making this decision. One manager argued that direct labor is always treated as a variable cost in textbooks and in practice and has always been considered a variable cost at TufStuff. After all, "direct" means you can directly trace the cost to products. "If direct labor is not a variable cost, what is?" Another manager argued just as strenuously that direct labor should be considered a fixed cost at TufStuff. No one had been laid off in over a decade, and for all practical purposes, everyone at the plant is on a monthly salary. Everyone classified as direct labor works a regular 40.00 -hour workweek and overtime has not been necessary since the company adopted Lean Production techniques. Whether the welding machine is used to make drums or frames, the total payroll would be exactly the same. There is enough slack, in the form of idle time, to accommodate any increase in total direct labor time that the bike frames would require. Required: 1. Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the WVD drums and bike frames? 2. Compute the contribution margin per unit. [assume direct labor is a fixed cost] 3. Compute the contribution margin per welding hour. [assume direct labor is a fixed cost] 4. Assuming direct labor is a fixed cost: a. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured. b. What is the increase (decrease) in net operating income that would result from this plan over current operations? 5. Compute the contribution margin per unit. [assume direct labor is a variable cost] 6. Compute the contribution margin per welding hour. [assume direct labor is a variable cost] 7. Assuming direct labor is a variable cost: a. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured. b. What is the increase (decrease) in net operating income that would result from this plan over current operations? Compute the contribution margin per unit. [assume direct labor is a fixed cost] (Do not round intermediate calculations. Round your answers to 2 decimal places.) Compute the contribution margin per welding hour: [assume direct labor is a fixed cost] (Round your intermediate calculations and final answers to 2 decimal places:) Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured. [Assume direct labor is a fixed cost] Complete this question by entering your answers in the tabs below. What is the increase (decrease) in net operating income that would result from this plan over current operations? [Assume direct labor is a fixed cost] (Round your intermediate calculations to 2 decimal places. Round final answer to the nearest whote dollar value.) Compute the contribution margin per unit. [assume direct labor is a variable cost] (Do not round intermediate ca Round your answers to 2 decimal places.) Compute the contribution margin per welding hour. [assume direct labor is a variable cost] (Round your intermediate calculations and final answers to 2 decimal places.) [Assume direct labor is a variable cost]. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured. What is the increase (decrease) in net operating income that would result from this plan over current operations? [Assume direct labor is a variable cost] (Do not round intermediate calculations.) TufStuff, Incorporated, sells a wide range 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 WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,280 hours of welding time is avallable annually on the machine Because each drum requires 0.4 hours of welding machine time, annual production is limited to 5,700 drums. At present, the welding machine Is used exclusively to make the WVD drums The accounting department has provided the following financial data concerning the WVD drums Management belleves 7,250. WVD 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 additlonal druims from an outside supplier. Harcor Industrles, Incorporated, a supplier of quality products, would be able to provide up to 4,700 WVD-type drums per year at a price of \$180 per drum, which TufStuff would reseli to its customers at its normal selling price after approprlate 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 05 hours of welding machine time per frame and yet sell for far more than the drums. Megan belleves that Tufstuff could sell up to 1880 -bike frames per year to bike manufacturers at a price of $309 each. The accounting department has provided the following data concerning the proposed new product. The bike frames could be produced with existiag equlpment and oersonnel Manufacturing overhead is allocated to products on the basis of direct labor-hours. Most of the manufacturing overhead corisists of fixed common costs such as rent on the factory bullding. but some of it is varlable. The varlable manufacturing overhead has been estimated at \$1.35 per WVD drum and $190 per bike frame. The variable manufacturing overhead cost would not be incurred on drums acaulired from the outside supplier. Selling and administrative expenses are allocated to products on the basis of revenues. Almost all of the selling and administrative expenses are fixed common costs, but it has been estimated that varlable selling and administrative expenses amount to $.75 per WVD drum whether made or purchased and would be $270 per bike frame manufacturing blke frames, which would require only 0.5 hours of welding machine time per frame and yet sell for far more than the drums. Megan belleves that Turstuff could sell up to 1,880 bike frames per year to blke manufacturers at a price of $309 each. The accounting department has provided the following data concerning the proposed new product: The blke frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on the basis of direct labor-hours. Most of the manufacturing overhead consists of fixed common costs such as rent on the factory bullding, but some of it is varlable. The varlable manufacturing overhead has been estimated at $1.35 per WVD drum and $1.90 per bike frame. The varlable 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 revenues. Almost all of the selling and administrative expenses are fixed common costs, but it has been estimated that varlable selling and administrative expenses amount to $.75 per WVD drum whether made or purchased and would be $2.70 per bike frame. All of the company's employees-direct and indirect-are pald for full 40.00-hour work weeks and the company has a policy of laying off workers only in major recessions. As soon as your analysis was shown to the top management team at Tufstuff, several managers got into an argument concerning how direct labor costs should be treated when making this decision. One manager argued that direct labor is always treated as a varlable cost in textbooks and in practice and has always been considered a varlable cost at Tufstuff. After all, "direct" means you can directly trace the cost to products. "If direct labor is not a varlable cost, what is?" Another manager argued just as strenuously that direct labor should be considered a fixed cost at Tufstuff. No one had been lald off in over a decade, and for all practical purposes, everyone at the plant is on a monthly salary. Everyone classified as direct labor works a regular 40.00 -hour workweek and overtime has not been necessary since the company adopted Lean Production techniques. Whether the welding machine is used to make drums or frames, the total payroll would be exactly the same. There is enough slack, In the form of idle time, to accommodate any increase in total direct labor time that the blke frames would require. Required: 1. Would you be comfortable relying on the financlal data provided by the accounting department for making decisions related to the WVD drums and blke frames? 2. Compute the contribution margin per unit. [assume direct labor is a fixed cost] 3. Compute the contribution margin per welding hour. [assume direct labor is a fixed cost] 4. Assuming direct labor is a fixed cost: a. Determine the number of WVD drums (f any) that should be purchased and the number of WVD drums and or blke frames (if any) that should be manufactured. b. What is the increase (decrease) In net operating income that would result from this plan over current operations? 5. Compute the contribution margin per unit. [assume direct labor is a varlable cost] 6. Compute the contribution margin per welding hour. [assume direct labor is a varlable cost] 7. Assuming direct labor is a varlable cost
