TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers t
ID: 2601847 • Letter: 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 2,400 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 3,000 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the financial data concerning the WVD drums: WVD Drums Seling price per drum Cost per drum 44.90 Direct materials Direct labor ($18 per hour) Selling and administrative expense 15.80 6875 Margin per drum Management believes 3,500 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 1,600 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, 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 0.2 hours of welding machine time per frame and yet sell for far more than the drums. Megan believes that TufStuff could sell up to 3,300 bike frames per year to bike manufacturers at a price of $69 each. The accounting department has provided the following data concerning the proposed new product Bike Frames Selling price per frame 69.00 Cost per frame: Direct materials Direct labor ($18 per hour) 17.90 22 50 Seling and administrative expense 6.90 6345 Margin per frame $ 555Explanation / Answer
1. N0
Explanation:
Product margins computed by the accounting department for the drums and bike frames should not be used in the decision of which product to make. The financial data provided by the accounting department are useless and potentially misleading for making this decision.
The product margins may change due to presence of allocated fixed common costs that are irrelevant in this decision.
2. Compute the contribution margin per unit for [assume direct labor is a fixed cost]:
Purchased WVD Drums
Manufactured WVD Drums
Bike Frames
Selling price
$159.00
$159.00
$69.00
Variable costs:
Direct materials
120
44.9
17.9
Variable manufacturing overhead
0
1.09
1
Variable selling and administrative
0.89
0.89
0.8
Total variable cost
120.89
46.88
19.7
Contribution margin
$38.11
$112.12
$49.30
3. a. Compute the contribution margin per welding hour for [assume direct labor is a fixed cost]:
Manufactured
WVD Drums
Bike Frames
Contribution margin per unit (calculated above)
112.12
49.30
Welding hours per unit
0.8 hour
0.2 hour
Contribution margin per welding hour
= contribution margin per unit / Welding hours per unit
$140.15
per hour
$246.50
per hour
Here, from the above calculation we can see clearly that the contribution margin per welding hour is more for the bike frames than for the WVD drums, Therefore, the Bike frames make the most profitable use of the welding machine. Thus, company first manufacture as many bike frames as possible up to demand and then use any leftover capacity to produce WVD drums to maximize their profit.
3. b. 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. [Assume direct labor is a fixed cost]
Quantity
Welding Time per Unit
Total Welding Time
Balance of Welding Time
Total hours available
2,400
Bike frames produced
3,300
0.2
3,300*0.2= 660
1,740
WVD Drums—make
1,740/0.8 = 2,175
0.8
1,740
0
WVD Drums—buy
3,500- 2,175 = 1,325
3. c. What is the increase in net operating income that would result from this plan over current operations? (Do not round intermediate calculations.)
(a)
(b)
(a) × (b)
Quantity
Unit Contri-bution Margin
Total Contri-bution
Bike frames produced
3,300
$49.30
$162,690
WVD Drums—make
2,175
$112.12
$243,861
WVD Drums—buy
1,325
$38.11
$50,496
Total contribution margin
457,046.75
Less: Contribution margin from present operations: 3,000 drums × $112.12 Contribution margin per drum
336,360
Increased contribution margin and net operating income
120,686.75
4. a. Compute the contribution margin per unit for [assume direct labor is a variable cost]:
Manufactured
Purchased WVD Drums
Manufactured WVD Drums
Bike Frames
Selling price
$159.00
$159.00
$69.00
Variable costs:
Direct materials
120
44.9
17.9
Direct labor
0
4.5
22.5
Variable manufacturing overhead
0
1.09
1
Variable selling and administrative
0.89
0.89
0.8
Total variable cost
120.89
51.38
42.2
Contribution margin
$38.11
$107.62
$26.80
4. b. Compute the contribution margin per welding hour for [assume direct labor is a variable cost]:
Manufactured
WVD Drums
Bike Frames
Contribution margin per unit (calculated above)
107.62
26.80
Welding hours per unit
0.8 hour
0.2 hour
Contribution margin per welding hour
= contribution margin per unit / Welding hours per unit
$134.525
per hour
$134
per hour
4. c. 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. [Assume direct labor is a variable cost]
Quantity
Welding Time per Unit
Total Welding Time
Balance of Welding Time
Total hours available
2,400
WVD Drums—make
2,400/0.8 = 3,000
0.8
2,400
0
Bike frames produced
0
0.2
0
0
WVD Drums—buy
3,500-3,000 = 500
4. d. What is the increase in net operating income that would result from this plan over current operations? (Do not round intermediate calculations.)
(a)
(b)
(a) × (b)
Quantity
Unit Contri-bution Margin
Total Contri-bution
WVD Drums—make
3,000
$107.62
$322,860
Bike frames produced
0
$26.80
$0
WVD Drums—buy
500
$38.11
$19,055
Total contribution margin
341,915
Less: Contribution margin from present operations: 3,000 drums × $107.62
322,860
Contribution margin per drum
Increased contribution margin and net operating income
$19,055
Purchased WVD Drums
Manufactured WVD Drums
Bike Frames
Selling price
$159.00
$159.00
$69.00
Variable costs:
Direct materials
120
44.9
17.9
Variable manufacturing overhead
0
1.09
1
Variable selling and administrative
0.89
0.89
0.8
Total variable cost
120.89
46.88
19.7
Contribution margin
$38.11
$112.12
$49.30
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