TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers t
ID: 2510524 • 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 2,500 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 $ 173.00 Selling price per drumm Cost per drum: $46.70 Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense 4.50 5.35 17.60 74.15 Margin per drum $ 98.85 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 1,600 wVD-type drums per year at a price of $140 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 4,000 bike frames per year to bike manufacturers at a price of $76 each. The accounting department has provided the following data concerning the proposed new product Bike Frames Selling price per frame Cost per frame $ 76.00 Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense $19.70 22.50 17.95 8.70 68.85 Margin per frame $ 7.15Explanation / Answer
Answer 1. The product margins computed by the Company for the drums and bike frames should not be used in the decision making of the which product is produced. The product margin is lower due to allocated fixed common costs that are irrelevant in decision making. Moreover, decision should be made on the constraint resource i.e, Welding Time. Answer 2. Assume Direct Labor is Fixed Cost Purchase WVD Drum Manufactured WVD Drums Bike Frames Selling Price 173.00 173.00 76.00 Variable Costs Direct materials 140.00 46.70 19.70 Variable Manf. Overhead - 1.27 2.80 Variable Selling & Admn. Exp. 1.07 1.07 2.60 Total Variable Cost 141.07 49.04 25.10 Contribution Margin 31.93 123.96 50.90 Answer 3.a. Manufactured WVD Drums Bike Frames Contribution Margin 123.96 50.90 Welding Hour per Unit 0.80 0.20 Contribution Margin per welding Hour 154.95 254.50 Answer 3.b & c. Since, the Contribution margin per welding hour (constrained resouce) of Bike Frames is more than WVD Drums, so Bike frames must be produced up to the demand level. The demand of the WVD Drum can be met by purchasing the WVD Drum from outside supplier. Quantity Unit Contribution Margin Welding Time per unit Total Welding Time Balance of Welding time Total Conbtribution Total hours available 2,500 Bikes Frames Produced 4,000 50.90 0.20 800 1,700 203,600.00 WVD - drums Make 2,125 123.96 0.80 1,700 - 263,415.00 WVD - drums Buy 1,500 31.93 - - - 47,895.00 Total Contribution Margin 514,910.00 Less: Contribution Margin from Current operations - WVD Drums - 3,125 Nos X $123.96 387,375.00 Inceased Contrbution Margin & Net Operating Income 127,535.00 Purchased Manufactured WVD Drums 1,500 2,125 Bike Frames 4,000 Incerase in Net operating Income 127,535.00 Answer 4. a. Assume Direct Labor as Variable Cost Purchase WVD Drum Manufactured WVD Drums Bike Frames Selling Price 173.00 173.00 76.00 Variable Costs Direct materials 140.00 46.70 19.70 Direct Labor - 4.50 22.50 Variable Manf. Overhead - 1.27 2.80 Variable Selling & Admn. Exp. 1.07 1.07 2.60 Total Variable Cost 141.07 53.54 47.60 Contribution Margin 31.93 119.46 28.40 Answer 4. b. Manufactured WVD Drums Bike Frames Contribution Margin 119.46 28.40 Welding Hour per Unit 0.80 0.20 Contribution Margin per welding Hour 149.33 142.00 Answer 4.b & c. In this case, the decision is totally reversed. The company should manufactured WVD drums as many as possible and after that some welding hours is left, the Bike frame to be produced Quantity Unit Contribution Margin Welding Time per unit Total Welding Time Balance of Welding time Total Conbtribution Total hours available 2,500 WVD - drums Make 3,125 119.46 0.80 2,500 - 373,312.50 WVD - drums Buy 500 31.93 - - - 15,965.00 Total Contribution Margin 389,277.50 Less: Contribution Margin from Current operations - WVD Drums - 3125 Nos X $119.45 373,312.50 Inceased Contrbution Margin & Net Operating Income 15,965.00 Purchased Manufactured WVD Drums 500 3,125 Bike Frames - Incerase in Net operating Income 15,965.00
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.