TufStuff, Incorporated, 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 $2,240$ hours of welding

time is available annually on the machine. Because each drum requires $0\mathrm{.}4$ hours of welding machine time, annual production is limited

to $5,600$ 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 $7,200$ 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, Incorporated, a supplier of quality products, would be able to provide up to $4,600$ WVD$-$type drums per year at a price of

$$174$ 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 $0\mathrm{.}5$ hours of welding machine time per frame and yet sell for far more than the

drums. Megan believes that TufStuff could sell up to $1,840$ bike frames per year to bike manufacturers at a price of $$299$ 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. 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,

put some of it is variable. The variable manufacturing overhead has been estimated at $$1\mathrm{.}35$ per WVD drum and $$1\mathrm{.}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 $$\mathrm{.}75$ per

WVD drum whether made or purchased and would be $$2\mathrm{.}50$ per bike frame.

All of the company's employees$-$direct and indirect$-$are paid for full $40\mathrm{.}00-$hour work weeks and the company has a policy of laying

fff workers only in major recessions.

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

race 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 $40\mathrm{.}00-$hour workweek and overtime has not been

hecessary 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

abor time that the bike frames would require.

Required:

Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the

WVD drums and bike frames?

Compute the contribution margin per unit. $[$assume direct labor is a fixed cost$]$

Compute the contribution margin per welding hour. $[$assume direct labor is a fixed cost$]$

Assuming direct labor is a fixed cost:

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.

b$.$ What is the increase $($decrease$)$ in net operating income that would result from this plan over current operations?

Compute the contribution margin per unit. $[$assume direct labor is a variable cost$]$

Compute the contribution margin per welding hour. $[$assume direct labor is a variable cost$]$

Assuming direct labor is a variable cost:

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.

b$.$ What is the increase