Selling and administrative expenses are allocated to products on the basis of the 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	0.75	per drum whether made or purchased and would be					1.30	per frame

1. Compute the impacts and recommend to management which strategy would result in the highest profits to Drummond. Requirement 1: Make or buy the drums (or some combination - this is sheet 2) Requirement 2: Produce only the bike frames (sheet 3) Requirement 3: Make/buy combination of drums and frames (sheet 4)

Canisters Inc. sells a wide variety 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 WD drum used to store toxic waste. Production is constrained by the capacity of an automated welding machine, which has a maximum capacity of 2,000 hours of welding time available. Each drum requires 0.40 hour of welding time, and production is currently maximized. At present, the welding machine is used exclusively to make WD drums. The accounting department has provided the following financial data concerning WD drums: WD Drums Selling price per drum Cost per drum $ 149.00 52.10 3.60 Direct Materials Direct Labor ($18/hour) Manufacturing Overhead Selling and Admin Margin per drum 4.50 29.80 90.00 $ 59.00 Management believes that a total of 6,000 WD drums could be sold each year if the company had sufficient capacity. As an alternative to adding another welding machine, management has considered buying additional drums from an outside supplier, Beater Industries. Beater would be able to provide up to 4,000 WD type drums per year at a price of 138 per drum, which Canisters would resell at its normal sales price after labeling. 0.50 hours Meliha Cicek, production manager, has suggested that the company could make better use of the welding machine by manufacturing bike frames, which would require only of welding time per frame and yet sell for far more than drums. Meliha believes that Canisters could sell 1,600 bike frames per year to manufacturers at a price of 239 each The accounting department has provided the following data concerning proposed product: $ 239.00 Bike Frames Selling price per frame Cost per frame Direct Materials Direct Labor ($18/hour) Manufacturing Overhead Selling and Admin. Margin per frame $ 99.40 $ 28.80 $36.00 $ 47.80 $ 212.00 $ 27,00 The bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on the basis of 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 1.35 per WD drum and 1.90 The variable manufacturing overhead cost would not be incurred on drums acquired from the outside supplier