'l'ERM 1, AY 2023-2024 One manager argued that direct labor is always treated as a variable cost in textbooks and practice and has always been considered a variable cost ofthe firm. After all, "direct\" means you can directly trace the cost of the products. "If direct labor is not a variable cost, what is?" Another manager argued just as strenuously that direct labor costs should be considered as xed costs of the rm. No one had been laid off in over a decade, and for all practical purposes, everyone at the plant was on a monthly salary. Everyone classied as direct labor works on a regular 40-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 the same. There is enough slack, in the form of idle time, to accommodate any increase in total . ACCCOB3 WRITTEN GROUP BUSINESS CASE ANALYSIS TERM 1, AY 2023-2024 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 95,420.00 Direct Labor {969.00 per hour) 1,600.00 Manufacturing Overhead 1,950.00 Total unit manufacturing costs F 8,970.00 Unit Marketing & Admin Costs 2,570.00 11,540.00 Margin per drum P 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 xed common costs such as rent on the factory building, but some of it is variable. The variable manufacturing overhead has been estimated at 13 73.75 per drum and 9 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 9 77.10 per bike frame. All ofthe 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. b. 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-olivine! answers to two decimal places Required 2. Compute the contribution margin per unit for: u. Purchased HVM Drums b. Manufactured HVM Drums c. Manufactured Classic-Elite Bike Frames Required 3. Determine the number of HVM drums {if any) that should be purchased and the number of HVM drums and/or bike frames (if any) that should be manufactured. What is the increase in net operating income that would result from this plan over the current operations? As soon as your analysis was shown to the top management team at CCCI, several managers got into an argument concerning how direct labor costs should be treated when making this decision