Please help with question 3. 1 and 2 have already been completed and are for reference only.
**PLEASE HELP WITH PART 3 ONLY** 1 AND 2 HAVE ALREADY BEEN COMPLETED.**
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 wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,.200 hours of welding time is available annually on the machine. Because each drum requires 0.8 hours of welding machine time, annual production is limited to 2,750 drums. At present, the welding machine is used exclusively to make the WWD drums. The accounting department has provided the following financial data conceming the WVD drums: WVD Drums Selling price per drum Cost per drum: $ 156.00 Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense $44.70 2 68.15 Margin per drum $ 87.85 Management believes 3,250 WVD drums could be sold each year if the company had sufficient manufacturing capacity. As an alternative Inc., a supplier of quality products, would be able to provide up to 2,000 WVD-type drums per year at a price of $140 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 drums. Megan believes that TufStuff could sell up to 3,100 bike frames per year to bike manufacturers at a price of $67 each. The accounting department has provided the following data concerning the proposed new product: 67.00 Cost per frame: $17.70 Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense Margin per frame S 4.15 The bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on the basis of it is variable. The variable manufacturing overhead has been estimated at $1.07 per WVD drum and $.80 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 $0.87 per WVD drum whether made or purchased and would be $.60 per bike frame. All of the company's employees-direct and indirect-are paid for full 40-hour workweeks and the company has a policy of laying off Required 1. Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the WWD drums and bike frames? Yes 2. Compute the contribution margin per unit for [assume direct labor is a fixed cost]: (Do not round intermediate calculations. Round your answers to 2 decimal places.) Contribution Margin $15.13 per unit b. Manufactured WVD drums 109.36 per unit c. Manufactured bike frames47.90 per unit a. Purchased WVD drums 3. 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-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. a. Compute the contribution margin per welding hour for [assume direct labor is a fixed cost]: (Round your final answers to 2 decimal places.) Contribution Margin per hour per hour Manufactured WVD drums Manufactured bike frames b. 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] Purchased Manufactured WVD drums Bike frames c. What is the increase in net operating income that would result from this plan over current operations? (Do not round intermediate calculations.) Increase in net operating income
