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 2,000 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding 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:

WVD Drums

Selling price per drum ................................ $149.00

Cost per drum:

Direct materials ...................................... $52.10

Direct labor ($18 per hour) ..................... 3.60

Manufacturing overhead ......................... 4.50

Selling and administrative expense ......... 29.80 90.00

Margin per drum ........................................ $ 59.00

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.

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 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:

Bike Frames

Selling price per frame................................ $239.00

Cost per frame:

Direct materials ....................................... $99.40

Direct labor ($18 per hour) ...................... 28.80

Manufacturing overhead ......................... 36.00

Selling and administrative expense ..... 47.80 212.00

Margin per frame ........................................ $ 27.00

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 variable. The variable manufacturing overhead has been estimated at $1.35 per 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 $0.75 per WVD drum whether made or purchased and would be $1.30 per bike frame.

All of the company's employeesdirect and indirectare paid for full 40-hour workweeks and the company has a policy of laying off workers only in major recessions. There is a disagreement among managers about how direct labor costs should be treated when taking decisions. Some managers argued that direct labor is always treated as a variable cost in textbooks and in practice and as such must be considered as variable cost at TufStuff. Some manager argued 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. Everything 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. Briefly explain your logic and reasoning for taking following decisions, under the above two assumptions (arguments) about direct labor costs:

1. Producing drums or the bike frames.

2. Product mix strategy

3. Your preference about direct labor costs as variable or fixed in this situation