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 2,200 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 2,750 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 171.00 Selling price per drum Cost per drum: Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense $45.30 4.50 3.95 16.20 69.95 Margin per drum 101.05 Management believes 3,250 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 2,000 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 Megan Flores, TufStuffs production manager, has suggested that the company could make better use of the welding machine by manufacturing bike frames, which would require only 0.2 hours of welding machine time per frame and yet sell for far more than the drums. Megan believes that TufStuff could sell up to 3,700 bike frames per year to bike manufacturers at a price of $73 each. The accounting department has provided the following data concerning the proposed new product: Bike Frames $ 73.00 Selling price per frame Cost per frame Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense $18.30 22.50 16.55 7.30 64.65 8.35 Margin per frame

Explanation / Answer

Tutstuff Inc, 1) NO 2 Computation of contribution margin per unit of Purchased WVD drums Manufactured WVD drums Manufactured Bike frames Sales Per Unit 171 171 73 Less : Variable cost Per Unit Cost of buying 120 Direct Material 45.3 18.3 Manufacturing overhead 1.13 1.4 Selling & distribution overhead 0.93 0.93 1.2 Total Variable cost per unit 120.93 47.36 20.9 Margin per unit 50.07 123.64 52.1 3a) Contribution margin per welding hour Manufactured WVD drums Manufactured Bike frames A Margin per unit 123.64 52.1 B Hours per unit 0.8 0.2 A/B Contribution margin per welding hour 154.55 260.5 Ranking       II        I 3b) Maximum production 1168 3700 Welding machine hours consumed 1460 740 Maximum Sale quntity 3250 3700 No. of additional WVD drums required to fulfill sales demand 2082 Maximum quntity that can be bought 2000 So answer is Purchased manufactured WVD drums 2000 1168 Bike Frames      X 3700 3c) Computation of increase in net operating Income resulting from this plan Purchased WVD drums Manufactured WVD drums Manufactured bike frames Total Sales Quanity 2000 1168 3700 Selling Price 171 171 73 Total Sales Revenue 342000 199728 270100 811828 Less : Variable cost 0 Cost of buying 240000 240000 Direct Material 52910.4 67710 120620.4 Direct Labor Manufacturing overhead 1319.84 5180 6499.84 Selling & distribution overhead 1860 1086.24 4440 7386.24 Total Variable cost 241860 55316.48 77330 374506.5 Total Margin 100140 144411.52 192770 437321.5 Less : fixed cost Manufacturing overhead =2750*(3.95-1.13) 7755 Selling & distribution overhead =2750*(16.2-0.93) 41992.5 Direct Labor =40*365/7*18 37542.86 Total Fixed cost 87290.36 Net operating Income from revised plans 350031.2 Net operating Income from current operations 277887.5 Increase in Net Operating Income 72143.66 Requirement 2 & 3 assuming Direct cost is variable Computation of contribution margin per unit of Purchased WVD drums Manufactured WVD drums Manufactured Bike frames Sales Per Unit 171 171 73 Less : Variable cost Per Unit Cost of buying 120 Direct Material 45.3 18.3 Direct Labor 4.5 22.5 Manufacturing overhead 1.13 1.4 Selling & distribution overhead 0.93 0.93 1.2 Total Variable cost per unit 120.93 51.86 43.4 Margin per unit 50.07 119.14 29.6 Contribution margin per welding hour Manufactured WVD drums Manufactured Bike frames A Margin per unit 119.14 29.6 B Hours per unit 0.8 0.2 A/B Contribution margin per welding hour 148.925 148.000 Ranking I II Maximum production 2750 0 Welding machine hours consumed 2200 0 Maximum Sale quntity 3250 3700 No. of additional WVD drums required to fulfill sales demand 500 Quantity that will be bought 500 So answer is Purchased manufactured WVD drums 500 2750 Bike Frames      X       X Computation of increase in net operating Income resulting from this plan Purchased WVD drums Manufactured WVD drums Manufactured bike frames Total Sales Quanity 500 2750 Selling Price 171 171 0 Total Sales Revenue 85500 470250 0 555750 Less : Variable cost 0 Cost of buying 60000 60000 Direct Material 124575 124575 Direct Labor 12375 12375 Manufacturing overhead 3107.5 3107.5 Selling & distribution overhead 465 2557.5 3022.5 Total Variable cost 60465 142615 0 203080 Total Margin 25035 327635 0 352670 Less : fixed cost Manufacturing overhead =2750*(3.95-1.13) 7755 Selling & distribution overhead =2750*(16.2-0.93) 41992.5 Total Fixed cost 49747.5 Net operating Income from revised plans 302922.5 Net operating Income from current operations 277887.5 Increase in Net Operating Income 25035

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