Storage Systems, Inc., sells a wide range of drums, bins, boxes, and other conta
ID: 2450054 • Letter: S
Question
Storage Systems, 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 XSX 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 are available annually on the machine. Because each drum requires 0.8 hours of welding time, annual production is limited to 2,875 drums. At present, the welding machine is used exclusively to make the XSX drums. The accounting department has provided the following financial data concerning the XSX drums:
Management believes 3,375 XSX drums could be sold each year if the company had sufficient manufacturing capacity. As an alternative to adding another welding machine, management has looked into the possibility of buying additional drums from an outside supplier. Metal Products, Inc., a supplier of quality products, would be able to provide up to 2,000 XSX-type drums per year at a price of $120 per drum, which Storage Systems would resell to its customers at its normal selling price after appropriate relabeling.
Jasmine Morita, Storage Systems’ production manager, has suggested that the company could make better use of the welding machine by manufacturing premium mountain bike frames, which would require only 0.2 hours of welding time per frame. Jasmine believes that Storage Systems could sell up to 3,800 mountain bike frames per year to mountain bike manufacturers at a price of $78 per frame. The accounting department has provided the following data concerning the proposed new product:
8.50
68.25
9.75
The mountain bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on the basis of 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 $1.25 per XSX drum and $2.60 per mountain bike frame. The variable manufacturing overhead cost would not be incurred on drums acquired from the outside supplier.
Selling and administrative expenses are allocated to products on the basis of 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 $1.05 per XSX drum and would be $2.40 per mountain bike frame. The variable selling and administrative expenses of $1.05 per drum would be incurred when drums acquired from the outside supplier are sold to the company’s customers.
All of the company’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.
Redo requirements (2) and (3) above, making the opposite assumption about direct labor from the one you originally made. In other words, if you treated direct labor as a variable cost, redo the analysis treating it as a fixed cost. If you treated direct labor as a fixed cost, redo the analysis treating it as a variable cost.
Compute the contribution margin per unit for [assume direct labor is a variable cost]: (Round your intermediate calculations and final answers to 2 decimal places.)
Compute the contribution margin per welding hour for [assume direct labor is a variable cost]: (Round your intermediate calculations and final answers to 2 decimal places.)
Determine the number of XSX drums (if any) that should be purchased and the number of XSX drums and/or mountain bike frames (if any) that should be manufactured. [assume direct labor is a variable cost] (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.)
What is the improvement in net income that would result from this plan over current operations? (Round the "Contribution margin" to 2 decimal places, intermediate calculations and final answer to the nearest dollar amount.)
XSX Drums Selling price per drum $ 178.00 Cost per drum: Direct materials $ 46.50 Direct labor ($18 per hour) 4.50 Manufacturing overhead 5.15 Selling and administrative expense 17.40 73.55 Margin per drum $ 104.45Explanation / Answer
Per unit contribution Margin analysis Details XSX Manufactured Mountain Bike Frame XSX purchased Units 2875 3,800.0 2000 Selling Price 178.0 78.0 178 Unit costs Direct Material 46.5 19.50 120 Direct Labor 4.5 22.50 Variable Manufacturing OH 1.25 2.60 Variable selling & Admin OH 1.05 2.40 1.05 Total Variable cost 53.3 47.00 121.05 Contribution Margin /unit 124.7 31.0 56.95 Total contribution 358,513 117,800 113,900 Fixed Costs Fixed Manufacturinh OH 11,213 57,570 Fixed selling & Admin OH 47,006 23,180 Total Fixed cost 58,219 80,750 Net Income 300,294 37,050 113,900 Precision welding m/c Hr/unit 0.8 0.2 Contribution /Welding Hr 155.9 155.00 As contribution per precision welding machine hr is more for XSX then XSX should be produced 100% 4.a Details XSX Manufactured Mountain Bike Frame XSX purchased Contribution Margin /unit 124.7 31.0 56.95 4.b Details XSX Manufactured Mountain Bike Frame Contribution Margin /unit 124.7 31.0 Contribution /Welding Hr 155.9 155.0 4.c.. Assuming no limit for demand for XSX drums , as the contribution/unit of welding hr of XSX drum is more , total 2300 hours should be used for XSX drums apart from purchasing and selling 2000 XSX from outside. Details Manufactured XSX purchased XSX drums 2875 2,000.0 Mountain bike frame 0 4. d. Improvement in net income will be the additional $113,900 net addition to income from 2000 purchased XSX drums. Improvement in net income will be the additional $113,900 net addition to income from 2000 purchased Improvement in Net Income = $ 113,900 4 If direct labor cost is fixed then the situation will be Per unit contribution Margin analysis Details XSX Manufactured Mountain Bike Frame XSX purchased Units 2875 3,800.0 2000 Selling Price 178.0 78.0 178 Unit costs Direct Material 46.5 19.50 120 Variable Manufacturing OH 1.25 2.60 Variable selling & Admin OH 1.05 2.40 1.05 Total Variable cost 48.8 24.50 121.05 Contribution Margin /unit 129.2 53.5 56.95 Total contribution 371,450 203,300 113,900 Fixed Costs Fixed Manufacturinh OH 11,213 57,570 Fixed selling & Admin OH 47,006 23,180 Fixed labor cost 12,938 85,500 Total Fixed cost 71,156 166,250 Net Income 300,294 37,050 113,900 Precision welding m/c Hr/unit 0.8 0.2 Contribution /Welding Hr 161.5 267.50 As contribution per precision welding machine hr is more for Mountain bike frame then it should be produced 100%