50.1K

Verified Solution

Link Copied!

Caryl Crates & Containers, Inc. $($CCCl$)$

The firm sells a wide range of containers that are used in the chemical and laboratory industry. One of the company's products is

a heavy$-$duty corrosion$-$resistant metal drum, called the HVM drum is used to store hazardous volatile materials $($HVM$)$

considered toxic wastes.

Utilization of a Constrained Resource; Make or Buy

Production of the HVM drum is constrained by the capacity of an automated welding machine that is used to make precision

welds. A total of $2,000$ hours of welding time is available annually on the machine. Because each drum requires $0\mathrm{.}4$ hours of

welding time, annual production is limited to $5,000$ drums. At present, the welding machine is used exclusively to make the HVM

drum. The Accounting Department has provided the following financial data concerning the HVM drum:

HVM DRUMS

Selling Price per drum.

$P8,195\mathrm{.}00$

Cost per drum:

Direct Materials

$.$P$2,851\mathrm{.}80$

Direct Labor $($P$69\mathrm{.}00$ per hour$)...........196\mathrm{.}80$

Manufacturing Overhead $...............245\mathrm{.}80$

Total Unit Manufacturing Costs $.........$P$3,294\mathrm{.}40$

Unit Marketing and Admin Costs $........1,622\mathrm{.}60$

Margin Per Drum

$P3,278\mathrm{.}00$

Management believes $6,000$ HVM 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.

Container Distributors Inc., a supplier of quality products, would be able to provide $4,000$ HVM$-$type drums per year for $7,621$

per drum, which $CCCl$ would resell to its customers at its normal selling after appropriate relabeling.

Conchita Corazon, CCCl$\text{'}$s production manager, has suggested that the company could make better use of the welding machine

by manufacturing classic$-$elite bike frames, which would require only $0\mathrm{.}5$ hours of welding time per frame and yet sell for far more

than the drums. Conchita believes that $CCCl$ could sell up to $1,600$ classic$-$elite bike frames per year to bike manufacturers for

$13,112$ each.

The Accounting Department has provided the following data concerning the proposed new product:

HVM Drums

Selling Price per frame

Cost per frame:

Direct Materials

Direct Labor $($ $$69\mathrm{.}00$ per hour$)$

Manufacturing Overhead

Total unit manufacturing costs

Unit Marketing & Admin Costs

Margin per drum

P$13,112\mathrm{.}00$

$P5,420\mathrm{.}00$

$1,600,00$

$1,950\mathrm{.}00$

$..$ P $8,970\mathrm{.}00$

$.2,570\mathrm{.}00$

P $\frac{11,540\mathrm{.}00}{1,572\mathrm{.}00}$

The classic$-$elite bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to

the products based on 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 $73\mathrm{.}75$ per drum and

$97\mathrm{.}50$ per bike frame. The variable manufacturing overhead cost would not be incurred on drums acquired from an outside

supplier.

Selling and administrative expenses are allocated to the products based on 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 $P$

$48\mathrm{.}70$ per drum and $77\mathrm{.}10$ per bike frame.

All of the firm'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.

The contribution margin per unit for Manufactured Classic$-$Elite Bike Frames is

Manufactured Classic$-$Elite Bike Frames:

Selling Price per frame.

P$13,112\mathrm{.}00$

Less:

Direct Materials

$P5,420\mathrm{.}00$

Direct Labor $($$$69\mathrm{.}00$ per hour$)$

$1,600,00$

Manufacturing Overhead

$1,950\mathrm{.}00$

Total unit manufacturing costs

$\frac{1,950\mathrm{.}00}{P8,970\mathrm{.}00}$

Unit Marketing & Admin Costs

$1,572\mathrm{.}00$

$10,542\mathrm{.}00$

Margin per drum

How come Unit Marketing and Admin Costs became P$1,572$ and the Margin per drum became P$2,570?$ Please explain

the computation.

Answer & Explanation Solved by verified expert

See Answer