---### Decision Making Based on Cost Accounting: TufStuff Case StudyAs soon as your analysis was shown to the top management team at TufStuff, several managers got into an argument concerning how direct labor costs should be treated when making decisions. One manager argued that direct labor is always treated as a variable cost in textbooks and in practice and has always been a variable cost at TufStuff. After all, “direct” means you can directly trace the cost to products. “If direct labor is not a variable cost, what is?” Another manager argued just as strenuously that direct labor should be considered a fixed cost at TufStuff. No one had been hired in over a decade, and for all practical purposes, everyone at the plant is on a monthly salary. Everyone classified as direct labor works a regular 40.00-hour workweek and overtime has not been necessary since the company adopted Lean Production techniques. Whether the welding machine is used to make drums or frames, the total payroll would be exactly the same. There is enough slack, in the form of idle time, to accommodate any increase in total direct labor time that the bike frames would require.#### Required:1. **Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the WVD drums and bike frames?**2. **Compute the contribution margin per unit.** - *Assume direct labor is a fixed cost*3. **Compute the contribution margin per welding hour.** - *Assume direct labor is a fixed cost*4. **Assuming direct labor is a fixed cost:** a. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured. b. What is the increase (decrease) in net operating income that would result from this plan over current operations?5. **Compute the contribution margin per unit.** - *Assume direct labor is a variable cost*6. **Compute the contribution margin per welding hour.** - *Assume direct labor is a variable cost*7. **Assuming direct labor is a variable cost:** a. Determine the number of WVD drums (if any) that should be purchased and the number of WVD drums and/or bike frames (if any) that should be manufactured. b. What is the increase ( ### TufStuff, Incorporated: Financial Analysis of WVD Drums and Proposal for Bike FramesTufStuff, Incorporated, sells a variety of drums, bins, boxes, and other containers used in the chemical industry. One of the key products is the WVD drum, designed for storing toxic wastes. Production is limited by the capacity of an automated welding machine capable of making precision welds. With 2,360 hours available annually and a machine time restriction of 14 hours per WVD drum, the annual production is capped at 5,900 drums. The current usage of the welding machine is dedicated to WVD drums production.Below is the financial data for WVD Drums:#### WVD Drums Financial Data- **Selling price per drum**: $221.00- **Cost per drum**: - Direct materials: $52.10 - Direct labor ($14 per hour): $7.20 - Manufacturing overhead: $15.30 - Selling and administrative expense: $33.40 - **Total Cost per drum**: $108.00- **Margin per drum**: $113.00Management forecasts that 7,350 WVD drums could be sold each year if manufacturing capacity is sufficient. To address capacity constraints, an alternative solution is to buy additional drums from an outside supplier, Harcor Industries, Incorporated, at $192 per drum, which TufStuff can resell at its normal pricing after relabeling.Separately, Megan Flores, production manager at TufStuff, proposes using the welding machine for a new high-margin product: bike frames. Manufacturing bike frames require 0.5 hours of welding machine time each and could sell at a higher price. With an annual capacity for producing 1,960 bike frames, below is the financial analysis for the proposed product:#### Bike Frames Financial Data- **Selling price per frame**: $329.00- **Cost per frame**: - Direct materials: $110.20 - Direct labor ($18 per hour): $57.60 - Manufacturing overhead: $54.00 - Selling and administrative expense: $62.20- **Total Cost per frame**: $284.00- **Margin per frame**: $45.00Bike frames can be produced using existing equipment and personnel, allocating overhead costs based on direct labor-hours. While some manufacturing overhead

Hi studentSince there are multiple subparts, we will answer only first three subparts.Variable costs…

As soon as your analysis was shown to the top management team at TufStuff, several managers got into an argument concerning how direct labor costs should be treated when making this decision. One manager argued that direct labor is always treated as a variable cost in textbooks and in practice and has always been considered a variable cost at TufStuff. After all, "direct" means you can directly trace the cost to products. "If direct labor is not a variable cost, what is?" Another manager argued just as strenuously that direct labor should be considered a fixed cost at TufStuff. No one had been laid off in over a decade, and for all practical purposes, everyone at the plant is on a monthly salary. Everyone classified as direct labor works a regular 40.00-hour workweek and overtime has not been necessary since the company adopted Lean Production techniques. Whether the welding machine is used to make drums or frames, the total payroll would be exactly the same. There is enough slack, in the form of idle time, to accommodate any increase in total direct labor time that the bike frames would require. Required: 1. Would you be comfortable relying on the financial data provided by the accounting department for making decisions related to the WVD drums and bike frames? 2. Compute the contribution margin per unit. [assume direct labor is a fixed cost] 3. Compute the contribution margin per welding hour. [assume direct labor is a fixed cost]

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q