TufStuff, Inc., sells a wide range of drums, bins, boxes, andother containers that are used in the chemical industry. One of thecompany’s products is a heavy-duty corrosion-resistant metal drum,called the WVD drum, used to store toxic wastes. Production isconstrained by the capacity of an automated welding machine that isused to make precision welds. A total of 2,200 hours of weldingtime is available annually on the machine. Because each drumrequires 0.8 hours of welding machine time, annual production islimited to 2,750 drums. At present, the welding machine is usedexclusively to make the WVD drums. The accounting department hasprovided the following financial data concerning the WVD drums:Selling price per drum $ 177.00 Cost per drum: Direct materials$47.00 Direct labor ($18 per hour) 4.50 Manufacturing overhead 5.65Selling and administrative expense 17.90 75.05 Margin per drum $101.95 Management believes 3,250 WVD drums could be sold each yearif the company had sufficient manufacturing capacity. As analternative to adding another welding machine, management hasconsidered buying additional drums from an outside supplier. HarcorIndustries, Inc., a supplier of quality products, would be able toprovide up to 1,900 WVD-type drums per year at a price of $130 perdrum, which TufStuff would resell to its customers at its normalselling price after appropriate relabeling. Megan Flores,TufStuff’s production manager, has suggested that the company couldmake better use of the welding machine by manufacturing bikeframes, which would require only 0.2 hours of welding machine timeper frame and yet sell for far more than the drums. Megan believesthat TufStuff could sell up to 3,200 bike frames per year to bikemanufacturers at a price of $79 each. The accounting department hasprovided the following data concerning the proposed new product:Bike Frames Selling price per frame $ 79.00 Cost per frame: Directmaterials $20.00 Direct labor ($18 per hour) 22.50 Manufacturingoverhead 18.25 Selling and administrative expense 9.00 69.75 Marginper frame $ 9.25 The bike frames could be produced with existingequipment and personnel. Manufacturing overhead is allocated toproducts on the basis of direct labor-hours. Most of themanufacturing overhead consists of fixed common costs such as renton the factory building, but some of it is variable. The variablemanufacturing overhead has been estimated at $1.30 per WVD drum and$3.10 per bike frame. The variable manufacturing overhead costwould not be incurred on drums acquired from the outside supplier.Selling and administrative expenses are allocated to products onthe basis of revenues. Almost all of the selling and administrativeexpenses are fixed common costs, but it has been estimated thatvariable selling and administrative expenses amount to $1.10 perWVD drum whether made or purchased and would be $2.90 per bikeframe. All of the company’s employees—direct and indirect—are paidfor full 40-hour workweeks and the company has a policy of layingoff workers only in major recessions 1. Would you be comfortablerelying on the financial data provided by the accounting departmentfor making decisions related to the WVD drums and bike frames?Compute the contribution margin per unit for [assume direct laboris a fixed cost]: (Do not round intermediate calculations. Roundyour answers to 2 decimal places.) Compute the contribution marginper unit for [assume direct labor is a fixed cost]: (Do not roundintermediate calculations. Round your answers to 2 decimal places.)3. As soon as your analysis was shown to the top management team atTufStuff, several managers got into an argument concerning howdirect labor costs should be treated when making this decision. Onemanager argued that direct labor is always treated as a variablecost in textbooks and in practice and has always been considered avariable cost at TufStuff. After all, “direct” means you candirectly trace the cost to products. “If direct labor is not avariable cost, what is?” Another manager argued just as strenuouslythat direct labor should be considered a fixed cost at TufStuff. Noone had been laid off in over a decade, and for all practicalpurposes, everyone at the plant is on a monthly salary. Everyoneclassified as direct labor works a regular 40-hour workweek andovertime has not been necessary since the company adopted LeanProduction techniques. Whether the welding machine is used to makedrums or frames, the total payroll would be exactly the same. Thereis enough slack, in the form of idle time, to accommodate anyincrease in total direct labor time that the bike frames wouldrequire. a. Compute the contribution margin per welding hour for[assume direct labor is a fixed cost]: (Round your final answers to2 decimal places.) b. Determine the number of WVD drums (if any)that should be purchased and the number of WVD drums and/or bikeframes (if any) that should be manufactured. [Assume direct laboris a fixed cost] c. What is the increase in net operating incomethat would result from this plan over current operations? (Do notround intermediate calculations.) Redo requirements (2) and (3)making the opposite assumption about direct labor from the one youoriginally made. In other words, if you treated direct labor as avariable cost, redo the analysis treating it as a fixed cost. Ifyou treated direct labor as a fixed cost, redo the analysistreating it as a variable cost. a. Compute the contribution marginper unit for [assume direct labor is a variable cost]: (Do notround intermediate calculations. Round your answers to 2 decimalplaces.) b. Compute the contribution margin per welding hour for[assume direct labor is a variable cost]: (Round your final answersto 2 decimal places.) c. Determine the number of WVD drums (if any)that should be purchased and the number of WVD drums and/or bikeframes (if any) that should be manufactured. [Assume direct laboris a variable cost] d. What is the increase in net operating incomethat would result from this plan over current operations? (Do notround intermediate calculations.)