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:

wvd drums
selling price per drum $ 175.00
cost per drum:
direct materials $45.40
direct labor ($18 per hour) 4.50
manufacturing overhead 4.05
selling and administrative expense 16.30 70.25
margin per drum $ 104.75
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 1,800 wvd-type drums per year at a price of $130 per drum, which tufstuff would resell to its customers at its normal selling price after appropriate relabeling.

a. Yes, there is enough information to complete a cost analysis regarding the production of 1,725 drums, purchase of 1,400 from outside vendor and production of 3,100 bike frames.

Explanation:

b. Compute the contribution margin per unit for

drums produced internally: $ per unitdrums purchased from outside vendor: $ per unitbike frames: $ per unit

machine constraint welding hours per year

each drum required hours of welding

annual production limited to drums

alternative products:

bikes that use only welding hours per,

total sales welding hours

hours left for drums

drums

total demand for drums

that could be purchased from outside supplier at $ per unit

total manufacturing overhead:

variable $ per drum $ ($ per bike)

fixed overhead $ per drum $

allocated on the basis of direct labor hours: for drums and for bike frames

allocation of fixed overhead:  

fixed overhead per hour $

drums = $

bike frames = $

total S&A expenses:

$ = $

variable $ per drum $  ($ per bike)

fixed expenses $

allocated on the basis of revenues

fixed S&A per $

= $

= $per $

drums = $

bike frames = $

cost analysis:

                                        drums              drums               bike

                                        produced        purchased        frames

selling price:                      179                      179                    78

costs:

purchase price                       0                   120                       0

materials                           46.90                   0                    19.90

labor                                   4.50                    0                   22.50

var. man. overhead           1.29                     0                      3

fixed man. over.                0.619                   0                    3.091

variable S&A                      1.09                   1.09                2.80

fixed                                   9.333                9.333              4.068

subtotal                              63.732            130.423            55.359

profit margin                     115.268              48.577            22.641

contribution margin

only variable costs            125.22              57.91                29.80

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