managment belives 7250 wvd drums could be sold each year if the company had sufficient manufacturing capacity. as an alternative to adding antoher welding machine, managment has considered buying additinal drums from an outside supplier. a supplier of wuality products, would be able to provide up to 4,700 WVD type drums at a price of $180 per drum. which they would then resell to its customers at its normal selling price after appropriate relabeling.

the production manager has suggested that the company could make better use of its welsing machine by manufacturing bike frames, which would only require .5 hours of welding machine time per frame and yet sell for far more than the drums. they belive that they could sell up to 1,880 bike frames per year to bike manufactures at a price of $309 each.

company's products is a heavy-duty corrosion-resistant metal drum, called the WD drum, used to store toxic waste 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: $205.00 MVD Druma selling price per drum Cont per drum Direct materials Direct labor ($32 per hour) Manufacturing overhead Selling and administrative expense Hargin per drum $52.10 6.40 12.90 32.60 104.00 $101.00 $309.00 Bike Fr Selling price per frame Coat per frases Direct materials Direct labor (i per hour) Manufacturing overhead Selling and administrative expense Margin per fra $10.89 51.20 50.00 59.00 268.00 $ 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 verlable. The variable manufacturing overhead has been estimated at $1.35 por 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 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 Print ferences 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