Tutstutt, Inc, sells a wide range of drums, bins, boxes, and other containers th
ID: 2517186 • Letter: T
Question
Tutstutt, 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 WWD 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 exclus?ely to make the WVD drums The accounting department has provided the tollowing financial data concerning the WVD drums: WVD Drums 5 157.00 Selling price per drum Cost per drum Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense $44.80 4.50 3.45 15.70 68.45 $ 88.55 Margin per drum Management believes 3,375 WVD drums could be sold each year if the company had sutricient 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 1,500 WVD-type drums per year at a price of $100 per drum, which TufStuff would resell to its customers at its normal selling price after appropriate relabeling Megan Flores, Tustutrs production manager, has suggested that the company could make better use otthe welding machine by manufacturing bike trames, 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 3,200 bike frames per year to bike manufacturers at a price of S68 each. The accounting department has provided the following data concerning the proposed new product: Bike Frames S 68.00 Selling price per frame Cost per frame Direct materials Direct labor ($18 per hour) Manufacturing overhead Selling and administrative expense S17.80 22.50 16.05 6.8D 63.15 S 4.85 Margin per frameExplanation / Answer
Particulars
Purchased WVD Drums
WVD Drums
Bike Frames
Selling Price
$157
$157
$68
Variable costs:
Direct materials
$100
$44.80
$17.80
Variable manufacturing overhead
$0
$1.08
$0.90
Variable selling and administrative
$0.88
$0.88
$0.70
Total variable cost
$100.88
$46.76
$19.40
Contribution margin
$56.12
$110.24
$48.60
Particulars
WVD Drums
Bike Frames
Contribution margin per unit(1)
$110.24
$48.60
Welding hours per unit(2)
0.8
0.2
Contribution margin per welding hour[(1)/(2)]
$137.80 per hour
$243 per hour
Since the contribution per hour is greater for the bike frames than WVD drums, the frames yield more profits use of the welding machines. Hence, the company should manufacture as many bike frames and then use the remaining capacity to produce WVD drums. To fulfill the remaining demand of the drums the company can buy it from the supplier
Particulars
Quantity
Unit Contri-bution Margin
Welding Time per Unit
Total Welding Time
Balance of Welding Time
Total Contri-bution
Total hours available
2300
Bike frames produced
3200
$48.60
0.20
640
1660
$155520
WVD Drums—make
2075
$110.24
0.80
1660
0
$228748
WVD Drums—buy
1300
$56.12
-
-
-
$72956
Total contribution margin
$457224
Less: Contribution margin from present operations(2875x110.24)
$316940
Increased net operating income
$140284
Particulars
Purchased WVD Drums
WVD Drums
Bike Frames
Selling Price
$157
$157
$68
Variable costs:
Direct materials
$100
$44.80
$17.80
Direct Labour
$0
$4.50
$22.50
Variable manufacturing overhead
$0
$1.08
$0.90
Variable selling and administrative
$0.88
$0.88
$0.70
Total variable cost
$100.88
$51.26
$41.90
Contribution margin
$56.12
$105.74
$26.1
Particulars
WVD Drums
Bike Frames
Contribution margin per unit(1)
$105.74
$26.10
Welding hours per unit(2)
0.8
0.2
Contribution margin per welding hour[(1)/(2)]
$132.18 per hour
$130.50 per hour
Particulars
Quantity
Unit Contri-bution Margin
Welding Time per Unit
Total Welding Time
Balance of Welding Time
Total Contri-bution
Total hours available
2300
WVD Drums—make
2875
$105.74
0.80
2300
0
$304003
Bike Frames
-
$26.10
0.20
0
0
$0
WVD Drums—buy
500
$56.12
-
-
-
$28060
Total contribution margin
$332063
Less: Contribution margin from present operations(2875x105.74)
$304002.5
Increased net operating income
$28060.5
Particulars
Purchased WVD Drums
WVD Drums
Bike Frames
Selling Price
$157
$157
$68
Variable costs:
Direct materials
$100
$44.80
$17.80
Variable manufacturing overhead
$0
$1.08
$0.90
Variable selling and administrative
$0.88
$0.88
$0.70
Total variable cost
$100.88
$46.76
$19.40
Contribution margin
$56.12
$110.24
$48.60
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