TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers t
ID: 2602484 • 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 2,300 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 2,875 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:
Management believes 3,375 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, 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 3,800 bike frames per year to bike manufacturers at a price of $78 each. The accounting department has provided the following data concerning the proposed new product:
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 $1.25 per WVD drum and $2.60 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 $1.05 per WVD drum whether made or purchased and would be $2.40 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.
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?
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.)
3.
As soon as your analysis was shown to the top management team at TufStuff, several managers got into an argument concerning how direct labor costs should be treated when making this decision. One manager argued that direct labor is always treated as a variable cost in textbooks and in practice and has always been considered a variable cost at TufStuff. After all, “direct” means you can directly trace the cost to products. “If direct labor is not a variable cost, what is?” Another manager argued just as strenuously that direct labor should be considered a fixed cost at TufStuff. No one had been laid off in over a decade, and for all practical purposes, everyone at the plant is on a monthly salary. Everyone classified as direct labor works a regular 40-hour workweek and overtime has not been necessary since the company adopted Lean Production techniques. Whether the welding machine is used to make drums or frames, the total payroll would be exactly the same. There is enough slack, in the form of idle time, to accommodate any increase in total direct labor time that the bike frames would require.
Compute the contribution margin per welding hour for [assume direct labor is a fixed cost]: (Round your final answers to 2 decimal places.)
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]
c.
What is the increase in net operating income that would result from this plan over current operations? (Do not round intermediate calculations.)
4.
Redo requirements (2) and (3) making the opposite assumption about direct labor from the one you originally made. In other words, if you treated direct labor as a variable cost, redo the analysis treating it as a fixed cost. If you treated direct labor as a fixed cost, redo the analysis treating it as a variable cost.
a.
Compute the contribution margin per unit for [assume direct labor is a variable cost]: (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Compute the contribution margin per welding hour for [assume direct labor is a variable cost]: (Round your final answers to 2 decimal places.)
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]
What is the increase in net operating income that would result from this plan over current operations? (Do not round intermediate calculations.)
WVD Drums Selling price per drum $ 178.00 Cost per drum: Direct materials $46.50 Direct labor ($18 per hour) 4.50 Manufacturing overhead 5.15 Selling and administrative expense 17.40 73.55 Margin per drum $ 104.45Explanation / Answer
Labour cost is fixed cost
a. Contribution margin per unit
WVD Drums
Bike Frames
Selling price per frame
$ 178.00
$ 78.00
Variable cost:
Direct Material
$ 46.50
$ 19.50
Manufacturing Overhead
$ 1.25
$ 2.60
Selling and administrative expenses
$ 1.05
$ 2.40
Total Variable Cost
$ 48.80
$ 24.50
Contribution Margin
$ 129.20
$ 53.50
Fixed Cost:
Direct Labour
$ 4.50
$ 22.50
Manufacturing Overhead
$ 3.90
$ 15.15
Selling and administrative expenses
$ 16.35
$ 6.10
Total Fixed Cost
$ 24.75
$ 43.75
Net Operating Income
$ 104.45
$ 9.75
Welding hour per unit
0.8
0.2
Contribution Margin per welding hour
$ 161.50
$ 267.50
b. Number of WVD Drums purchased and number of WVD Drums /bikes manufactured
WVD Drums Purchased
WVD Drums manufactured
Units
500
2875
Sales
$ 89,000.00
$ 511,750.00
Variable cost:
Cost of purchase
$ 60,000.00
Direct Material
$ 133,687.50
Manufacturing Overhead
$ 3,593.75
Selling and administrative expenses
$ 525.00
$ 3,018.75
Total Variable Cost
$ 60,525.00
$ 140,300.00
Contribution Margin
$ 28,475.00
$ 371,450.00
Fixed Cost:
Direct Labour
$ 2,250.00
$ 12,937.50
Manufacturing Overhead
$ 1,950.00
$ 11,212.50
Selling and administrative expenses
$ 8,175.00
$ 47,006.25
Total Fixed Cost
$ 12,375.00
$ 71,156.25
Net Operating Income
$ 16,100.00
$ 300,293.75
Net operating income per WVD Drum purchased = Selling Price-(Cost of purchase+Fixed cost+Variable Selling & Administrative expenses)
Net operating income per WVD Drum purchased = $178-$120-$1.05-$24.75
= $32.20
Net operating income for WVD Drums manufactured is more as compared to Bike Frames manufacture thus it is recommended to
manufacture WVD Drums for the maximum capacity available with the company
c. Increase in Net Operating income
From the Purchase of 500 drums from market, the company can increase its net operating income by $16,100 per annum
WVD Drums Purchased
WVD Drums manufactured
Units
500
2875
Sales
$ 89,000.00
$ 511,750.00
Variable cost:
Cost of purchase
$ 60,000.00
Direct Material
$ 133,687.50
Manufacturing Overhead
$ 3,593.75
Selling and administrative expenses
$ 525.00
$ 3,018.75
Total Variable Cost
$ 60,525.00
$ 140,300.00
Contribution Margin
$ 28,475.00
$ 371,450.00
Fixed Cost:
Direct Labour
$ 2,250.00
$ 12,937.50
Manufacturing Overhead
$ 1,950.00
$ 11,212.50
Selling and administrative expenses
$ 8,175.00
$ 47,006.25
Total Fixed Cost
$ 12,375.00
$ 71,156.25
Net Operating Income
$ 16,100.00
$ 300,293.75
Labour Cost is Variable Cost
a. Contribution margin per unit
WVD Drums
Bike Frames
Selling price per frame
$ 178.00
$ 78.00
Variable cost:
Direct Material
$ 46.50
$ 19.50
Direct Labour
$ 4.50
$ 22.50
Manufacturing Overhead
$ 1.25
$ 2.60
Selling and administrative expenses
$ 1.05
$ 2.40
Total Variable Cost
$ 53.30
$ 47.00
Contribution Margin
$ 124.70
$ 31.00
Fixed Cost:
Manufacturing Overhead
$ 3.90
$ 15.15
Selling and administrative expenses
$ 16.35
$ 6.10
Total Fixed Cost
$ 20.25
$ 21.25
Net Operating Income
$ 104.45
$ 9.75
Welding hour per unit
$ 0.80
$ 0.20
Contribution Margin per welding hour
$ 155.88
$ 155.00
b. Number of WVD Drums purchased and number of WVD Drums /bikes manufactured
WVD Drums Purchased
WVD Drums manufactured
Units
500
2875
Sales
$ 89,000.00
$ 511,750.00
Variable cost:
Cost of purchase
$ 60,000.00
Direct Material
$ 133,687.50
Direct Labour
$ 12,937.50
Manufacturing Overhead
$ 3,593.75
Selling and administrative expenses
$ 525.00
$ 3,018.75
Total Variable Cost
$ 60,525.00
$ 153,237.50
Contribution Margin
$ 28,475.00
$ 358,512.50
Fixed Cost:
Manufacturing Overhead
$ 1,950.00
$ 11,212.50
Selling and administrative expenses
$ 8,175.00
$ 47,006.25
Total Fixed Cost
$ 10,125.00
$ 58,218.75
Net Operating Income
$ 18,350.00
$ 300,293.75
Net operating income per WVD Drum purchased = Selling Price-(Cost of purchase+Fixed cost+Variable Selling & Administrative expenses)
Net operating income per WVD Drum purchased = $178-$120-$1.05-$20.25
= $ 36.70
Net operating income for WVD Drums manufactured is more as compared to Bike Frames manufacture thus it is recommended to
manufacture WVD Drums for the maximum capacity available with the company
c. Increase in Net Operating income
From the Purchase of 500 drums from market, the company can increase its net operating income by $18,350 per annum
WVD Drums Purchased
WVD Drums manufactured
Units
500
2875
Sales
$ 89,000.00
$ 511,750.00
Variable cost:
Cost of purchase
$ 60,000.00
Direct Material
$ 133,687.50
Manufacturing Overhead
$ 12,937.50
Selling and administrative expenses
$ 3,593.75
Total Variable Cost
$ 525.00
$ 3,018.75
Contribution Margin
$ 60,525.00
$ 153,237.50
Fixed Cost:
$ 28,475.00
$ 358,512.50
Direct Labour
Manufacturing Overhead
$ 1,950.00
$ 11,212.50
Selling and administrative expenses
$ 8,175.00
$ 47,006.25
Total Fixed Cost
$ 10,125.00
$ 58,218.75
Net Operating Income
$ 18,350.00
$ 300,293.75
Labour cost is fixed cost
a. Contribution margin per unit
WVD Drums
Bike Frames
Selling price per frame
$ 178.00
$ 78.00
Variable cost:
Direct Material
$ 46.50
$ 19.50
Manufacturing Overhead
$ 1.25
$ 2.60
Selling and administrative expenses
$ 1.05
$ 2.40
Total Variable Cost
$ 48.80
$ 24.50
Contribution Margin
$ 129.20
$ 53.50
Fixed Cost:
Direct Labour
$ 4.50
$ 22.50
Manufacturing Overhead
$ 3.90
$ 15.15
Selling and administrative expenses
$ 16.35
$ 6.10
Total Fixed Cost
$ 24.75
$ 43.75
Net Operating Income
$ 104.45
$ 9.75
Welding hour per unit
0.8
0.2
Contribution Margin per welding hour
$ 161.50
$ 267.50
b. Number of WVD Drums purchased and number of WVD Drums /bikes manufactured
WVD Drums Purchased
WVD Drums manufactured
Units
500
2875
Sales
$ 89,000.00
$ 511,750.00
Variable cost:
Cost of purchase
$ 60,000.00
Direct Material
$ 133,687.50
Manufacturing Overhead
$ 3,593.75
Selling and administrative expenses
$ 525.00
$ 3,018.75
Total Variable Cost
$ 60,525.00
$ 140,300.00
Contribution Margin
$ 28,475.00
$ 371,450.00
Fixed Cost:
Direct Labour
$ 2,250.00
$ 12,937.50
Manufacturing Overhead
$ 1,950.00
$ 11,212.50
Selling and administrative expenses
$ 8,175.00
$ 47,006.25
Total Fixed Cost
$ 12,375.00
$ 71,156.25
Net Operating Income
$ 16,100.00
$ 300,293.75
Net operating income per WVD Drum purchased = Selling Price-(Cost of purchase+Fixed cost+Variable Selling & Administrative expenses)
Net operating income per WVD Drum purchased = $178-$120-$1.05-$24.75
= $32.20
Net operating income for WVD Drums manufactured is more as compared to Bike Frames manufacture thus it is recommended to
manufacture WVD Drums for the maximum capacity available with the company
c. Increase in Net Operating income
From the Purchase of 500 drums from market, the company can increase its net operating income by $16,100 per annum
WVD Drums Purchased
WVD Drums manufactured
Units
500
2875
Sales
$ 89,000.00
$ 511,750.00
Variable cost:
Cost of purchase
$ 60,000.00
Direct Material
$ 133,687.50
Manufacturing Overhead
$ 3,593.75
Selling and administrative expenses
$ 525.00
$ 3,018.75
Total Variable Cost
$ 60,525.00
$ 140,300.00
Contribution Margin
$ 28,475.00
$ 371,450.00
Fixed Cost:
Direct Labour
$ 2,250.00
$ 12,937.50
Manufacturing Overhead
$ 1,950.00
$ 11,212.50
Selling and administrative expenses
$ 8,175.00
$ 47,006.25
Total Fixed Cost
$ 12,375.00
$ 71,156.25
Net Operating Income
$ 16,100.00
$ 300,293.75
Labour Cost is Variable Cost
a. Contribution margin per unit
WVD Drums
Bike Frames
Selling price per frame
$ 178.00
$ 78.00
Variable cost:
Direct Material
$ 46.50
$ 19.50
Direct Labour
$ 4.50
$ 22.50
Manufacturing Overhead
$ 1.25
$ 2.60
Selling and administrative expenses
$ 1.05
$ 2.40
Total Variable Cost
$ 53.30
$ 47.00
Contribution Margin
$ 124.70
$ 31.00
Fixed Cost:
Manufacturing Overhead
$ 3.90
$ 15.15
Selling and administrative expenses
$ 16.35
$ 6.10
Total Fixed Cost
$ 20.25
$ 21.25
Net Operating Income
$ 104.45
$ 9.75
Welding hour per unit
$ 0.80
$ 0.20
Contribution Margin per welding hour
$ 155.88
$ 155.00
b. Number of WVD Drums purchased and number of WVD Drums /bikes manufactured
WVD Drums Purchased
WVD Drums manufactured
Units
500
2875
Sales
$ 89,000.00
$ 511,750.00
Variable cost:
Cost of purchase
$ 60,000.00
Direct Material
$ 133,687.50
Direct Labour
$ 12,937.50
Manufacturing Overhead
$ 3,593.75
Selling and administrative expenses
$ 525.00
$ 3,018.75
Total Variable Cost
$ 60,525.00
$ 153,237.50
Contribution Margin
$ 28,475.00
$ 358,512.50
Fixed Cost:
Manufacturing Overhead
$ 1,950.00
$ 11,212.50
Selling and administrative expenses
$ 8,175.00
$ 47,006.25
Total Fixed Cost
$ 10,125.00
$ 58,218.75
Net Operating Income
$ 18,350.00
$ 300,293.75
Net operating income per WVD Drum purchased = Selling Price-(Cost of purchase+Fixed cost+Variable Selling & Administrative expenses)
Net operating income per WVD Drum purchased = $178-$120-$1.05-$20.25
= $ 36.70
Net operating income for WVD Drums manufactured is more as compared to Bike Frames manufacture thus it is recommended to
manufacture WVD Drums for the maximum capacity available with the company
c. Increase in Net Operating income
From the Purchase of 500 drums from market, the company can increase its net operating income by $18,350 per annum
WVD Drums Purchased
WVD Drums manufactured
Units
500
2875
Sales
$ 89,000.00
$ 511,750.00
Variable cost:
Cost of purchase
$ 60,000.00
Direct Material
$ 133,687.50
Manufacturing Overhead
$ 12,937.50
Selling and administrative expenses
$ 3,593.75
Total Variable Cost
$ 525.00
$ 3,018.75
Contribution Margin
$ 60,525.00
$ 153,237.50
Fixed Cost:
$ 28,475.00
$ 358,512.50
Direct Labour
Manufacturing Overhead
$ 1,950.00
$ 11,212.50
Selling and administrative expenses
$ 8,175.00
$ 47,006.25
Total Fixed Cost
$ 10,125.00
$ 58,218.75
Net Operating Income
$ 18,350.00
$ 300,293.75
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