TuIStuff, 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 weiding machine that is used to make precision welds. A total of 2.200 hours of weiding time is avallable annually on the machine. Because each drum requires 0.4 hours of weiding machine time, annual production is limited to 5,500 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: Mariagement believes 7,150 WVD drums could be sold each year if the company had sufficient manufactunng capacity As an alternative to adding another welding machine, management has considered biying additional drums from an outside suppilet, Harcor inciustries, Inc a supplier of quality products, wourd be abie to provide up to 4,500 WVD-type drums per year at a pice of $168 per drum. which Turstuff would resell to its customers at its normal selling price after appropriate relabeling Management belleves 7,150 WVD drums could be sold each year if the company had sufficlent manufacturing capacity. As an alternative to adding another weiding machine, management has considered buying additional drums from an outside suppiler. Harcor Industries, Inc, a supplier of quality products, would be able to provide up to 4,500 WVD-type drums per year at a price of $168 per drum, which Turstuff would resell to its customers at its normal selling price after appropriate relabeling. Megan Flores, Turstuff'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 machine time per frame and yet sell for far mof than the drums. Megan belleves that TufStuff could sell up to 1,800 bike frames per year to bike manufacturers at a price of $289 each. The accounting department has provided the following data conceming 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 overnead consists of fixed common costs such as rent on the factory buifaing. but some of it is variable. The varlable 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 suppller. 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 $75 per WVD drum whether made or purchased and would be $2.30 per bike frame. All of the company's employees-direct and indirect-are pald for full 40.00-hour work weeks and the company has a pollcy of laying off workers only in major recessions. As soon as your analysis was shown to the top management team at Tursturt, several managers got into an argument ecincerning 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 vartable cost at Turstuff. 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 iabor should be considered a fixed cost at Tufstuft. 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 ciassified as direct labor works a regular- 40.00-hour workweek and overtime has not been necessary since the company adopted Lean Production techniques. Whether the weiding machine is used to make drums or frames. the total payroll would be exactly the same. There is enough slack. in the form of idie time, to accommodate any increase in total direct labor time that the bike frames would require. Required: 1. Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the labor time that the bike frames would require. Required: 1. Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the WND drums and bike frames? 2. Compute the contribution margin per unit, [assume direct labor is a fixed cost] 3. Compute the contribution margin per welding hour, (assume direct labor is a fixed cost) 4. Assuming direct labor is a fixed cost a Determine the number of WVD drums (if any) that should be purchased and the number of WVD drumb andior bike frames (if any) that should be manufactured b. What is the increase (decrease) in net operating income that would resuit from this plan over current operations? 5 Compute the contribution margin per unit [assume direct labor is a variable cost] 6. Compute the contribution margin per welding hour. [assume direct labor is a varible cast] 7. Assuming direct labor is a variable cost. a. Determine the number of WVD drums if any) that should be purchased and the number of Wvo drums andior pike fiames if anyl that should be manufactured. b. What is the increase (decrease) in ret operating income that would result from this pian over current operations