Question

- CASE 12-32 Make or Buy Decisions; Volume Trade-Off Decisions L012-1, L012-3, L012-5 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

Answer 1

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Tufstuff Inc.

Answer 1

Yes all the cost data and input usage data like welding hours and direct labor is provided. So we can rely on the information.

Answer 2	Purchase Drums	Manufacture Drums	Manufacture Bike Frames	Note
Sell price	149.00	149.00	239.00	A
Less: Variable costs
Purchase Price	138.00
Direct Material		52.10	99.40
Manufacturing overhead		1.35	1.90
Selling & Admin	0.75	0.75	1.30
Total Variable costs	138.75	54.20	102.60	B
Contribution per unit	10.25	94.80	136.40	C=A-B

Answer 3	Manufacture Drums	Manufacture Bike Frames	Note
Contribution per unit	94.80	136.40	See C
Welding hour per unit	0.40	0.50	D
Contribution per Welding hour	237.00	272.80	E=C/D

Workings for Answer 4

Contribution per Welding hour of Bike Frames is higher than Drums. So entire demand of Bike frames should be full filled first then remaining welding hours should be used for Drums. Remaining demand of drums should be fulfilled by buying it from outside supplier.

Welding hour per unit of Bike Frames	0.50	F
Demand of Bike Frames	1,600.00	G
Welding hour used for Bike Frames	800.00	H=F*G
Total welding hours available	2,000.00	I
Welding hours remaining	1,200.00	J=I-H
Welding hour per unit of drums	0.40	K
Drums manufactured	3,000.00	L=J/K
Annual demand for drums	6,000.00	M
Drums to be purchased from supplier	3,000.00	N=M-L
Calculation of fixed costs	Bike Frames	Note
Annual production	1,600.00	O
Direct labor cost per unit	28.80	P
Fixed labor cost	46,080.00	Q=O*P
Manufacturing overhead	36.00
Less: Variable Manufacturing overhead	1.90
Fixed Manufacturing overhead per unit	34.10	R
Total Fixed Manufacturing overhead	54,560.00	S=O*R
Selling & Admin	47.80
Less: Selling & Admin	1.30
Fixed Selling & Admin per unit	46.50	T
Total Fixed Selling & Admin	74,400.00	U=O*T
Current Net Income	Amount $
Drums sold	5,000.00
Margin per drum	59.00	V
Current Net Income	295,000.00	W=O*V

Revised Net Income	Purchase Drums	Manufacture Drums	Manufacture Bike Frames	Total	Note
Units sold	3,000.00	3,000.00	1,600.00		X
Contribution per unit	10.25	94.80	136.40		Y
Total Contribution	30,750.00	284,400.00	218,240.00	533,390.00	Z=X*Y
Less: Fixed costs
Fixed labor cost				46,080.00	See Q
Total Fixed Manufacturing overhead				54,560.00	See S
Total Fixed Selling & Admin				74,400.00	See U
Total Fixed costs				175,040.00	AA=Q+S+U
Revised Net Income	30,750.00	284,400.00	218,240.00	358,350.00	AB=Z-AA
Increase in net income				63,350.00	AC=AB-W