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 0.8 hours of welding machine time, annual production is limited to 2,500 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data:

WVD Drums

Selling price per drum: $174.00

Cost per drum

Direct materials: $46.80

Direct labor ($18 per hour): 4.50

Manufacturing overhead:5.45

Selling and administrative expense:17.70 ------ 74.45

Margin per drum: $99.55

Management believes 3,000 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 1,700 WVD-type drums per year at a price of $150 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 0.2 hours of welding machine time per frame and yet sell for far more than the drums. Megan believes that TufStuff could sell up to 3,000 bike frames per year to bike manufacturers at a price of $77 each. The accounting department has provided the following data concerning the proposed new product:

Bike Frames

Selling price per frame: $77.00

Cost per frame

Direct materials: $19.80

Direct labor ($18 per hour): 22.50

Manufacturing overhead: 18.05

Selling and administrative expense: 8.80 ------ 69.15

Margin per frame: $7.85

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 $1.28 per WVD drum and $2.90 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 $1.08 per WVD drum whether made or purchased and would be $2.70 per bike frame.

All of the company's employeesdirect and indirectare paid for full 40-hour workweeks.

Required:

2.

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].

What is the increase in net operating income that would result from this plan over current operations?(Do not round intermediate calculations.)

Drums Contrib Marg: $156.05

Bike Frames Contrib Marg: $258.00

------------------Purchased----------Manufactured

WVD drums: ?----------------------------?

Bike frames: 0 -----------------------------?