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: The bike frames could be produced with existing equipment and personnel. As indicated earlier, the company has a welding machine that can give only 2,000 hours of welding time. Therefore, it is a constrained resource. Assume that the cost of using the welding machine is fixed with respect to welding time (no matter for how many hours the welding machine is used in production, the cost is the same). What about the labor cost of welding itself (operating the welding machine)? It is already included as part of Direct labor (Variable) in the tables above. You want to make decisions in such a way to maximize the company's profit. Required: 1. The margins of the two products are provided in the report submitted by the Accounting Department. Margin is computed by subtracting both variable and fixed costs from sales price. Would you be comfortable using the margin amounts for making decisions related to the WVD drums and bike frames? Would you rather use contribution margin instead? Why or why not? For all questions below, you should provide detailed computations for your answers. 2. Compute the unit contribution margin for: a. Purchased WVD drums. b. Manufactured WVD drums. c. Manufactured bike frames. 3. Answer the following questions regarding WVD drums: a. What two options are available to obtain WVD drums? b. How much is the opportunity cost of Make (manufacture) and Sell 1 WVD drum - rather than Buy (purchase) and Sell it? c. How much is Unit Contribution Margin of manufactured WVD drum, net of opportunity cost? TufStuff, Inc., 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 waste. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,000 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 5,000 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 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 considered 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. It has been estimated that variable selling and administrative expenses amount to $0.75 per WVD drum whether it was made or purchased. 4. Which product should be manufactured first? Why? You should provide computations to justify your answer. 5. Determine: a. the number units that should be manufactured (if any) and purchased (if any) for WVD Drums. b. the number units that should be manufactured (if any) for Bike Frames. 6. Compute total contribution margin that would result from the optimal decision (determined in \#5). 7. ReProcessAll is an outside engineering firm. It can revise the production process in such a way that the required welding machine time on one Bike Frame is reduced by 10% (from 0.5 to 0.45 hours). Assume that the production priorities remain the same (as determined in \#4). What is the maximum amount that TufStuff would be willing to pay for the new process? 8. Ignore the information in \#7. Exwelda is an outside company that rents welding machines. Exwelda charges its machine rental fee by the hour of welding machine time. What would be the highest price per hour of welding machine time that TufStuff, Inc. is willing to pay? 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: The bike frames could be produced with existing equipment and personnel. As indicated earlier, the company has a welding machine that can give only 2,000 hours of welding time. Therefore, it is a constrained resource. Assume that the cost of using the welding machine is fixed with respect to welding time (no matter for how many hours the welding machine is used in production, the cost is the same). What about the labor cost of welding itself (operating the welding machine)? It is already included as part of Direct labor (Variable) in the tables above. You want to make decisions in such a way to maximize the company's profit. Required: 1. The margins of the two products are provided in the report submitted by the Accounting Department. Margin is computed by subtracting both variable and fixed costs from sales price. Would you be comfortable using the margin amounts for making decisions related to the WVD drums and bike frames? Would you rather use contribution margin instead? Why or why not? For all questions below, you should provide detailed computations for your answers. 2. Compute the unit contribution margin for: a. Purchased WVD drums. b. Manufactured WVD drums. c. Manufactured bike frames. 3. Answer the following questions regarding WVD drums: a. What two options are available to obtain WVD drums? b. How much is the opportunity cost of Make (manufacture) and Sell 1 WVD drum - rather than Buy (purchase) and Sell it? c. How much is Unit Contribution Margin of manufactured WVD drum, net of opportunity cost? TufStuff, Inc., 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 waste. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,000 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 5,000 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 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 considered 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. It has been estimated that variable selling and administrative expenses amount to $0.75 per WVD drum whether it was made or purchased. 4. Which product should be manufactured first? Why? You should provide computations to justify your answer. 5. Determine: a. the number units that should be manufactured (if any) and purchased (if any) for WVD Drums. b. the number units that should be manufactured (if any) for Bike Frames. 6. Compute total contribution margin that would result from the optimal decision (determined in \#5). 7. ReProcessAll is an outside engineering firm. It can revise the production process in such a way that the required welding machine time on one Bike Frame is reduced by 10% (from 0.5 to 0.45 hours). Assume that the production priorities remain the same (as determined in \#4). What is the maximum amount that TufStuff would be willing to pay for the new process? 8. Ignore the information in \#7. Exwelda is an outside company that rents welding machines. Exwelda charges its machine rental fee by the hour of welding machine time. What would be the highest price per hour of welding machine time that TufStuff, Inc. is willing to pay