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 2,500 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 3,125 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 Selling price per drum $ 162.00 Cost per drum: Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense $45.00 4.50 3.65 15.90 69.05 Margin per drum $ 92.95 Management believes 3,625 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 1,700 WvD-type drums per year at a price of $130 per drum, which TufStuffwould resell to its customers at its normal selling price after appropriate relabeling Megan Flores, TufStuf'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 3,400 bike frames per year to bike manufacturers at a price of $70 each. The accounting department has provided the following data concerning the proposed new product: Bike Frames Selling price per frame 70.00 Cost per frame Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense $18.00 22.50 16.25 7.00 63.75 Margin per frame $ 6.25 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 overhead consists of fixed common costs such as rent on the factory building, but some of it is variable. The variable manufacturing overhead has been estimated at $1.10 per WVD drum and $1.10 per bike frame. The variable manufacturing overhead cost would not be incurred on drums acquired from the outside supplier. 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 $0.90 per WVD drum whether made or purchased and would be S.90 per bike frame All of the company's employees-direct and indirect-are paid for full 40-hour workweeks and the company has a policy of laying off workers only in major recessions Required: 1. Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the WVD drums and bike frames? O Yes O No 2. Compute the contribution margin per unit for [assume direct labor is a fixed cost]: (Do not round intermediate calculations. Round your answers to 2 decimal places.) a. Purchased WWD drums b. Manufactured WVD drums C. Manufactured bike frames Contribution Margin per unit per unit per unit

Explanation / Answer

1) No. Reason: The information given does not specify the variable and fixed cost elements. 2) WORKINGS FOR CONTRIBUTION MARGIN PER UNIT: a) PURCHASED WVD DRUMS Selling price per drum 162.00 Variable expenses: Purchase cost 130.00 Manufacturing overhead 0.00 Selling and administrative expense 0.90 Total variable expenses 130.90 Contribution margin per unit 31.10 Answer b) MANUFACTURED WVD DRUMS Salling price per drum 162.00 Variable expenses: Direct materials 45.00 Manufacturing overhead 1.10 Selling and administrative expense 0.90 Total variable expenses 47.00 Contribution margin per unit 115.00 Answer MANUFACTURED BIKE FRAMES Salling price per drum 70.00 Variable expenses: Direct materials 18.00 Manufacturing overhead 1.10 Selling and administrative expense 0.90 Total variable expenses 20.00 Contribution margin per unit 50.00 Answer Contribution Margin a. Purchased WVD drums 31.10 per unit b. Manufactured WVD drums 115.00 per unit c. Manufactured bike frames 50.00 per unit 3) a) Contribution Margin Manufactured WVD Drums (115.00/0.8) 143.75 per hour Manufactured Bike frames (50.00/0.2) 250.00 per hour b) As the manufactured bike frame has the higher CM per machine hour it should be produced to the maximum. Hence, 3400 bike frames would be produced using 3400*0.2 = 680 machine hours Balance machine hours of 1820 (2500-680) would be used to produce 1820/0.8 = 2275 WDV frames. 3625-2275=1350 WDV drums can be purchased and sold. Hence, the allocation would be: Purchased Manufactured WVD drums 1350 2275 Bike frames 3400 c) Total contribution from current operations: 3125 WVD drums manufactured & sold = 3125*115.00 = 359375 Total contribution from revised plan: 2275 WVD drums manufactued and sold = 2275*115.00 = 261625 1350 WDV drums purchased and sold = 1350*31.10 = 41985 3400 Bike frames manufactured and sold = 3400*50.00 = 170000 Total contribution under revised plan 473610 INCREASE IN NET OPERATING INCOME 114235 Answer 4) WORKINGS FOR CONTRIBUTION MARGIN PER UNIT: PURCHASED WVD DRUMS Salling price per drum 162.00 Variable expenses: Purchase cost 130.00 Manufacturing overhead 0.00 Selling and administrative expense 0.90 Total variable expenses 130.90 Contribution margin per unit 31.10 MANUFACTURED WVD DRUMS Salling price per drum 162.00 Variable expenses: Direct materials 45.00 Direct labor 4.50 Manufacturing overhead 1.10 Selling and administrative expense 0.90 Total variable expenses 51.50 Contribution margin per unit 110.50 MANUFACTURED BIKE FRAMES Salling price per drum 70.00 Variable expenses: Direct materials 18.00 Direct labor 22.50 Manufacturing overhead 1.10 Selling and administrative expense 0.90 Total variable expenses 42.50 Contribution margin per unit 27.50 a) Contribution Margin Purchased WVD drums 31.10 per unit Manufactured WVD drums 110.50 per unit Manufactured bike frames 27.50 per unit b) Contribution Margin Manufactured WVD drums (110.50/.8) 138.13 per hour Manufactured bike frames (27.50/0.2) 137.50 per hour c) As the manufactured WVD has higher Contribution Margin per hour it should be produced to the maximum. Hence, 3125 WVD drums should be produced using 3125*0.8 = 2500 machine hours The machine hours available would thus be fully utilized for WVD drums. Hence, there would be no production of Bike frames. As 3125 WVD drums can be sold, balance 500 would be purchased and sold. Hence, the allocation would be: Purchased Manufactured WVD drums 500 3125 Bike frames 0 d) Total contribution from current operations: 3125 WVD drums manufactured & sold = 3125*110.50 = 345313 Total contribution from revised plan: 3125 WVD drums manufactued and sold = 3125*110.50 = 345313 500 WDV drums purchased and sold = 500*31.10 = 15550 Total contribution under revised plan 360863 INCREASE IN NET OPERATING INCOME 15550 Answer

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