TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers t

Question

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 2,100 hours of welding time is available annually on the machine. Because each drum requires 0.8 hours of welding machine time, annual production is limited to 2,625 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 Seling price per drum $ 179.00 Cost per drum: Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense17.80 $46.90 4.50 5.55 74.75 Margin per drum $104.25 Management believes 3,125 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 1,800 WVD-type drums per year at a price of $120 per drum, which TufStuff would resell to its customers at its normal selling price after appropriate relabeling

Explanation / Answer

No. It is because financial data provided by the accounting department do not have segregation of fixed cost and variable cost. And in this we will take decision only on the basis of variable cost. Hence, we cannot rely on the financial data provided by the accounting department.

2. Various contribution margin per unit considering salary as fixed cost are :-

Contribution per unit of purchased WVD Drums :-

Selling price. 179

Purchase price. 120

Variable selling & ADM. Exp. 1.09

Contribution per WVD Drum. 57.91

* It should be noted that in case of purchased drums no manufacturing overhead will brincurred. Thus not consider considered while calculating contribution.

Contribution per unit of manufactured WVD Drum

Selling price. 179

Direct Material . 46.90

Variable manufacturing overhead 1.29

Variable Selling & adm. exp. 1.09

Contribution per WVD drum . 129.72

Contribution per bike frame :-

Selling price . 78

Direct Material . 19.90

Variable Manufacturing Overhead 3

Variable selling & adm exp . 2.80

Contribution per bike frame. 52.3

* It should be noted that only variable exp are considered while calculating contribution. Hence, only variable portion of various exp is only considered.

3 Since idle time wages are paid as normal wages and also they are a kind of almost fixed employee thus it would be a better practice to treat their cost as fixed cost.

a) welding machine hour per unit of wvd drum = 0.8 hrs

And we have contribution per unit of wvd drum (calculated in earlier point)=129.72

Thus contribution of wvd drum per welding hour = 129.72/0.8 = 162.15

Similarly for bike,

Welding hour per bike frame = 0.2

Contribution per bike frame = 52.3

Thus, contribution of bike frame per welding hour = 52.3/0.2=261.5

C) Considering labour cost as fixed cost,

We have welding machine as limiting factor here therefore we will utilize our welding hours optimally by first making that product which is giving max. Contribution per welding hour taking figure from above point

Contribution bike frame per welding hour is more than wvd drum. Therefore we will first make bike frames

Total units required= 3100

Total time to make 3100 units = 3100x0.2=620 hrs.

Remaining hrs. After making bike = 2100-620=1480 hrs.

Total WVD drums which can be made in remaining hrs =1480/0.8=1850 Wvd drums

This, WVD drum 1850 (manufacture) 3125-1850=1275 (purchase)

Bike frame. 0 (purchase) 3100 (manufacture)

C) operating income in current operation

129.72x2625+57.91x1275=340515+73835.25=414350.25

Operating income as per new plan

Operating income on bike frame (52.3x3100). 162130

Operating income on drum. (129.72x1850) 239982

Operating income on purchased drum(57.91x1275)73835.25

Total operating income. 475947.25

Increase in net operating income = 61597

4 (a) contribution per unit of purchased wvd drum considering labour as variable cost

Selling price . 179

Purchase cost 120

Variable selling & ADM exp . 1.09

contrivution per drum. 57.91

Contribution per manufactured drum

Selling price. 179

Direct material. 46.90

Direct labour. 4.50

Variable manufacturing o/h. 1.29

Variable s & adm exp. 1.09

Contribution per drum. 125.22

Contribution per bike

Selling price. 78

Direct material . 19.90

Direct labour. 22.50

Variable manufacturing overhead . 3

Variable selling & adm exp . 2.80

Contribution per bike frame. 29.8

B) contribution of drum per welding hour =125.22/0.8=156.53

Contribution of bike per welding hour = 29.8/0.2=149

Since contribution per welding hour is Max. In case of drum thus first drum shall be manufactured wfichwill exhaust entire hours so condition will be similar to that of present condition

Thank you

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