TufStuff, Inc., sells a wide range of drums, bins, boxes, andother containers that are used in the chemical industry. One of thecompanyâs products is a heavy-duty corrosion-resistant metal drum,called the WVD drum, used to store toxic wastes. Production isconstrained by the capacity of an automated welding machine that isused to make precision welds. A total of 2,500 hours of weldingtime is available annually on the machine. Because each drumrequires 0.8 hours of welding machine time, annual production islimited to 3,125 drums. At present, the welding machine is usedexclusively to make the WVD drums. The accounting department hasprovided the following financial data concerning the WVD drums:
WVD Drums Selling price perdrum $ 169.00 Cost per drum: Directmaterials $46.20 Directlabor ($18 per hour) 4.50 Manufacturing overhead 4.85 Sellingand administrative expense 17.10 72.65 Margin per drum $ 96.35
Management believes 3,625 WVD drums could besold each year if the company had sufficient manufacturingcapacity. As an alternative to adding another welding machine,management has considered buying additional drums from an outsidesupplier. Harcor Industries, Inc., a supplier of quality products,would be able to provide up to 2,000 WVD-type drums per year at aprice of $130 per drum, which TufStuff would resell to itscustomers at its normal selling price after appropriaterelabeling.
Megan Flores, TufStuffâs production manager,has suggested that the company could make better use of the weldingmachine by manufacturing bike frames, which would require only 0.2hours of welding machine time per frame and yet sell for far morethan the drums. Megan believes that TufStuff could sell up to 3,500bike frames per year to bike manufacturers at a price of $75 each.The accounting department has provided the following dataconcerning the proposed new product:
Bike Frames Selling price perframe $ 75.00 Cost per frame: Directmaterials $19.20 Directlabor ($18 per hour) 22.50 Manufacturing overhead 17.45 Sellingand administrative expense 8.20 67.35 Margin perframe $ 7.65
The bike frames could be produced withexisting equipment and personnel. Manufacturing overhead isallocated to products on the basis of direct labor-hours. Most ofthe manufacturing overhead consists of fixed common costs such asrent on the factory building, but some of it is variable. Thevariable manufacturing overhead has been estimated at $1.22 per WVDdrum and $2.30 per bike frame. The variable manufacturing overheadcost would not be incurred on drums acquired from the outsidesupplier.
Selling and administrative expenses areallocated to products on the basis of revenues. Almost all of theselling and administrative expenses are fixed common costs, but ithas been estimated that variable selling and administrativeexpenses amount to $1.02 per WVD drum whether made or purchased andwould be $2.10 per bike frame.
All of the companyâs employeesâdirect andindirectâare paid for full 40-hour workweeks and the company has apolicy of laying off workers only in major recessions.
Required:
1. Would you be comfortable relying on the financial data providedby the accounting department for making decisions related to theWVD drums and bike frames?
Yes No
2. Compute the contribution margin per unit for [assume directlabor is a fixed cost]: (Do not round intermediatecalculations. Round your answers to 2 decimal places.)
Contribution Margin a. Purchased WVD drums per unit b. Manufactured WVD drums per unit c. Manufactured bike frames per unit
3. As soon as your analysis was shown to the top management team atTufStuff, several managers got into an argument concerning howdirect labor costs should be treated when making this decision. Onemanager argued that direct labor is always treated as a variablecost in textbooks and in practice and has always been considered avariable cost at TufStuff. After all, âdirectâ means you candirectly trace the cost to products. âIf direct labor is not avariable cost, what is?â Another manager argued just as strenuouslythat direct labor should be considered a fixed cost at TufStuff. Noone had been laid off in over a decade, and for all practicalpurposes, everyone at the plant is on a monthly salary. Everyoneclassified as direct labor works a regular 40-hour workweek andovertime has not been necessary since the company adopted LeanProduction techniques. Whether the welding machine is used to makedrums or frames, the total payroll would be exactly the same. Thereis enough slack, in the form of idle time, to accommodate anyincrease in total direct labor time that the bike frames wouldrequire.
a. Compute the contribution margin per welding hour for [assumedirect labor is a fixed cost]: (Round your final answers to2 decimal places.)
Contribution Margin Manufactured WVD drums perhour Manufactured bike frames perhour
b.
Determine the number of WVD drums (if any) that should bepurchased and the number of WVD drums and/or bike frames (if any)that should be manufactured. [Assume direct labor is a fixedcost]
Purchased Manufactured WVDdrums Bikeframes
c. What is the increase in net operating income that would resultfrom this plan over current operations? (Do not roundintermediate calculations.)
Increasein net operating income
4.
Redo requirements (2) and (3) making the opposite assumptionabout direct labor from the one you originally made. In otherwords, if you treated direct labor as a variable cost, redo theanalysis treating it as a fixed cost. If you treated direct laboras a fixed cost, redo the analysis treating it as a variablecost.
a. Compute the contribution margin per unit for [assume directlabor is a variable cost]: (Do not round intermediatecalculations. Round your answers to 2 decimal places.)
Contribution Margin Purchased WVD drums per unit Manufactured WVD drums per unit Manufactured bike frames per unit
b. Compute the contribution margin per welding hour for [assumedirect labor is a variable cost]: (Round your final answersto 2 decimal places.)
Contribution Margin Manufactured WVD drums perhour Manufactured bike frames perhour
c. Determine the number of WVD drums (if any) that should bepurchased and the number of WVD drums and/or bike frames (if any)that should be manufactured. [Assume direct labor is a variablecost]
Purchased Manufactured WVDdrums Bikeframes
d. What is the increase in net operating income that would resultfrom this plan over current operations? (Do not roundintermediate calculations.)
Increasein net operating income
TufStuff, Inc., sells a wide range of drums, bins, boxes, andother containers that are used in the chemical industry. One of thecompanyâs products is a heavy-duty corrosion-resistant metal drum,called the WVD drum, used to store toxic wastes. Production isconstrained by the capacity of an automated welding machine that isused to make precision welds. A total of 2,500 hours of weldingtime is available annually on the machine. Because each drumrequires 0.8 hours of welding machine time, annual production islimited to 3,125 drums. At present, the welding machine is usedexclusively to make the WVD drums. The accounting department hasprovided the following financial data concerning the WVD drums: |
| WVD Drums | |||
| Selling price perdrum | $ | 169.00 | |
| Cost per drum: | |||
| Directmaterials | $46.20 | ||
| Directlabor ($18 per hour) | 4.50 | ||
| Manufacturing overhead | 4.85 | ||
| Sellingand administrative expense | 17.10 | 72.65 | |
| Margin per drum | $ | 96.35 | |
Management believes 3,625 WVD drums could besold each year if the company had sufficient manufacturingcapacity. As an alternative to adding another welding machine,management has considered buying additional drums from an outsidesupplier. Harcor Industries, Inc., a supplier of quality products,would be able to provide up to 2,000 WVD-type drums per year at aprice of $130 per drum, which TufStuff would resell to itscustomers at its normal selling price after appropriaterelabeling. |
Megan Flores, TufStuffâs production manager,has suggested that the company could make better use of the weldingmachine by manufacturing bike frames, which would require only 0.2hours of welding machine time per frame and yet sell for far morethan the drums. Megan believes that TufStuff could sell up to 3,500bike frames per year to bike manufacturers at a price of $75 each.The accounting department has provided the following dataconcerning the proposed new product: |
| Bike Frames | |||
| Selling price perframe | $ | 75.00 | |
| Cost per frame: | |||
| Directmaterials | $19.20 | ||
| Directlabor ($18 per hour) | 22.50 | ||
| Manufacturing overhead | 17.45 | ||
| Sellingand administrative expense | 8.20 | 67.35 | |
| Margin perframe | $ | 7.65 | |
The bike frames could be produced withexisting equipment and personnel. Manufacturing overhead isallocated to products on the basis of direct labor-hours. Most ofthe manufacturing overhead consists of fixed common costs such asrent on the factory building, but some of it is variable. Thevariable manufacturing overhead has been estimated at $1.22 per WVDdrum and $2.30 per bike frame. The variable manufacturing overheadcost would not be incurred on drums acquired from the outsidesupplier. |
Selling and administrative expenses areallocated to products on the basis of revenues. Almost all of theselling and administrative expenses are fixed common costs, but ithas been estimated that variable selling and administrativeexpenses amount to $1.02 per WVD drum whether made or purchased andwould be $2.10 per bike frame. |
| All of the companyâs employeesâdirect andindirectâare paid for full 40-hour workweeks and the company has apolicy of laying off workers only in major recessions.
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Related questions
TufStuff, Inc., sells a wide range of drums, bins, boxes, andother containers that are used in the chemical industry. One of thecompanyâs products is a heavy-duty corrosion-resistant metal drum,called the WVD drum, used to store toxic wastes. Production isconstrained by the capacity of an automated welding machine that isused to make precision welds. A total of 2,200 hours of weldingtime is available annually on the machine. Because each drumrequires 0.8 hours of welding machine time, annual production islimited to 2,750 drums. At present, the welding machine is usedexclusively to make the WVD drums. The accounting department hasprovided the following financial data concerning the WVD drums: |
| WVD Drums | |||
| Selling price perdrum | $ | 156.00 | |
| Cost per drum: | |||
| Directmaterials | $44.70 | ||
| Directlabor ($18 per hour) | 4.50 | ||
| Manufacturing overhead | 3.35 | ||
| Sellingand administrative expense | 15.60 | 68.15 | |
| Margin per drum | $ | 87.85 | |
Management believes 3,250 WVD drums could besold each year if the company had sufficient manufacturingcapacity. As an alternative to adding another welding machine,management has considered buying additional drums from an outsidesupplier. Harcor Industries, Inc., a supplier of quality products,would be able to provide up to 2,000 WVD-type drums per year at aprice of $140 per drum, which TufStuff would resell to itscustomers at its normal selling price after appropriaterelabeling. |
Megan Flores, TufStuffâs production manager,has suggested that the company could make better use of the weldingmachine by manufacturing bike frames, which would require only 0.2hours of welding machine time per frame and yet sell for far morethan the drums. Megan believes that TufStuff could sell up to 3,100bike frames per year to bike manufacturers at a price of $67 each.The accounting department has provided the following dataconcerning the proposed new product: |
| Bike Frames | |||
| Selling price perframe | $ | 67.00 | |
| Cost per frame: | |||
| Directmaterials | $17.70 | ||
| Directlabor ($18 per hour) | 22.50 | ||
| Manufacturing overhead | 15.95 | ||
| Sellingand administrative expense | 6.70 | 62.85 | |
| Margin perframe | $ | 4.15 | |
The bike frames could be produced withexisting equipment and personnel. Manufacturing overhead isallocated to products on the basis of direct labor-hours. Most ofthe manufacturing overhead consists of fixed common costs such asrent on the factory building, but some of it is variable. Thevariable manufacturing overhead has been estimated at $1.07 per WVDdrum and $.80 per bike frame. The variable manufacturing overheadcost would not be incurred on drums acquired from the outsidesupplier. |
Selling and administrative expenses areallocated to products on the basis of revenues. Almost all of theselling and administrative expenses are fixed common costs, but ithas been estimated that variable selling and administrativeexpenses amount to $0.87 per WVD drum whether made or purchased andwould be $.60 per bike frame. |
All of the companyâs employeesâdirect andindirectâare paid for full 40-hour workweeks and the company has apolicy of laying off workers only in major recessions. |
| Required: |
| 1. | Would you be comfortable relying on the financial data providedby the accounting department for making decisions related to theWVD drums and bike frames? | ||||||
| |||||||
| 2. | Compute the contribution margin per unit for [assume directlabor is a fixed cost]: (Do not round intermediatecalculations. Round your answers to 2 decimal places.) |
| 3. | As soon as your analysis was shown to the top management team atTufStuff, several managers got into an argument concerning howdirect labor costs should be treated when making this decision. Onemanager argued that direct labor is always treated as a variablecost in textbooks and in practice and has always been considered avariable cost at TufStuff. After all, âdirectâ means you candirectly trace the cost to products. âIf direct labor is not avariable cost, what is?â Another manager argued just as strenuouslythat direct labor should be considered a fixed cost at TufStuff. Noone had been laid off in over a decade, and for all practicalpurposes, everyone at the plant is on a monthly salary. Everyoneclassified as direct labor works a regular 40-hour workweek andovertime has not been necessary since the company adopted LeanProduction techniques. Whether the welding machine is used to makedrums or frames, the total payroll would be exactly the same. Thereis enough slack, in the form of idle time, to accommodate anyincrease in total direct labor time that the bike frames wouldrequire. |
| a. | Compute the contribution margin per welding hour for [assumedirect labor is a fixed cost]: (Round your final answers to2 decimal places.) |
| b. | Determine the number of WVD drums (if any) that should bepurchased and the number of WVD drums and/or bike frames (if any)that should be manufactured. [Assume direct labor is a fixedcost] |
| c. | What is the increase in net operating income that would resultfrom this plan over current operations? (Do not roundintermediate calculations.) |
| 4. | Redo requirements (2) and (3) making the opposite assumptionabout direct labor from the one you originally made. In otherwords, if you treated direct labor as a variable cost, redo theanalysis treating it as a fixed cost. If you treated direct laboras a fixed cost, redo the analysis treating it as a variablecost. |
| a. | Compute the contribution margin per unit for [assume directlabor is a variable cost]: (Do not round intermediatecalculations. Round your answers to 2 decimal places.) |
| b. | Compute the contribution margin per welding hour for [assumedirect labor is a variable cost]: (Round your final answersto 2 decimal places.) |
| c. | Determine the number of WVD drums (if any) that should bepurchased and the number of WVD drums and/or bike frames (if any)that should be manufactured. [Assume direct labor is a variablecost] |
| d. | What is the increase in net operating income that would resultfrom this plan over current operations? (Do not roundintermediate calculations.) |
