As soon as your analysis was shown to the top management team at TufStuff, several managers got into an argument concerning howdirect labor costs should be treated when making this decision. One manager argued that direct labor is always treated as a variablecost in textbooks and in practice and has always been considered a variable cost at TufStuff. After all, "direct" means you can directlytrace the cost to products. "If direct labor is not a variable cost, what is?" Another manager argued just as strenuously that direct laborshould be considered a fixed cost at TufStuff. No one had been laid off in over a decade, and for all practical purposes, everyone at theplant is on a monthly salary. Everyone classified as direct labor works a regular 40.00-hour workweek and overtime has not beennecessary 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 directlabor 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 theWVD 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 (decrease) in net operating income that would result from this plan over current operations? TufStuff, Incorporated, sells a wide range of drums, bins, boxes, and other 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 is used to make precision welds. A total of 2,360 hours of weldingtime is available annually on the machine. Because each drum requires 0.4 hours of welding machine time, annual production islimited to 5,900 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department hasprovided the following financial data concerning the WVD drums:WVD DrumsSelling price per drumCost per drum:Direct materialsDirect labor ($36 per hour)Manufacturing overheadSelling and administrative expenseMargin per drumSelling price per frameCost per frame:Direct materialsDirect labor ($18 per hour)$ 52.107.2015.3033.40Management believes 7,350 WVD drums could be sold each year if the company had sufficient manufacturing capacity. As analternative to adding another welding machine, management has considered buying additional drums from an outside supplier. HarcorIndustries, Incorporated, a supplier of quality products, would be able to provide up to 4,900 WVD-type drums per year at a price of$192 per drum, which TufStuff would resell to its customers at its normal selling price after appropriate relabeling.Bike FramesMegan Flores, TufStuff's production manager, has suggested that the company could make better use of the welding machine bymanufacturing bike frames, which would require only 0.5 hours of welding machine time per frame and yet sell for far more than thedrums. Megan believes that TufStuff could sell up to 1,960 bike frames per year to bike manufacturers at a price of $329 each. Theaccounting department has provided the following data concerning the proposed new product:Manufacturing overheadSelling and administrative expenseMargin per frame$ 221.00108.00$ 113.00$110.2057.6054.0062.20$ 329.00284.00$ 45.00The bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on thebasis 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 $1.35 per WVD drum and $1.90 per 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 administrativeexpenses are fixed common costs, but it has been estimated that variable selling and administrative expenses amount to $.75 perWVD drum whether made or purchased and would be $3.10 per bike frame.All of the company's employees-direct and indirect-are paid for full 40.00-hour work weeks and the company has a policy of layingoff workers only in major recessions.

Question

As soon as your analysis was shown to the top management team at TufStuff, several managers got into an argument concerning howdirect labor costs should be treated when making this decision. One manager argued that direct labor is always treated as a variablecost in textbooks and in practice and has always been considered a variable cost at TufStuff. After all, &#34;direct&#34; means you can directlytrace the cost to products. &#34;If direct labor is not a variable cost, what is?&#34; Another manager argued just as strenuously that direct laborshould be considered a fixed cost at TufStuff. No one had been laid off in over a decade, and for all practical purposes, everyone at theplant is on a monthly salary. Everyone classified as direct labor works a regular 40.00-hour workweek and overtime has not beennecessary 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 directlabor 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 theWVD 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 (decrease) in net operating income that would result from this plan over current operations? TufStuff, Incorporated, sells a wide range of drums, bins, boxes, and other 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 is used to make precision welds. A total of 2,360 hours of weldingtime is available annually on the machine. Because each drum requires 0.4 hours of welding machine time, annual production islimited to 5,900 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department hasprovided the following financial data concerning the WVD drums:WVD DrumsSelling price per drumCost per drum:Direct materialsDirect labor ($36 per hour)Manufacturing overheadSelling and administrative expenseMargin per drumSelling price per frameCost per frame:Direct materialsDirect labor ($18 per hour)$ 52.107.2015.3033.40Management believes 7,350 WVD drums could be sold each year if the company had sufficient manufacturing capacity. As analternative to adding another welding machine, management has considered buying additional drums from an outside supplier. HarcorIndustries, Incorporated, a supplier of quality products, would be able to provide up to 4,900 WVD-type drums per year at a price of$192 per drum, which TufStuff would resell to its customers at its normal selling price after appropriate relabeling.Bike FramesMegan Flores, TufStuff's production manager, has suggested that the company could make better use of the welding machine bymanufacturing bike frames, which would require only 0.5 hours of welding machine time per frame and yet sell for far more than thedrums. Megan believes that TufStuff could sell up to 1,960 bike frames per year to bike manufacturers at a price of $329 each. Theaccounting department has provided the following data concerning the proposed new product:Manufacturing overheadSelling and administrative expenseMargin per frame$ 221.00108.00$ 113.00$110.2057.6054.0062.20$ 329.00284.00$ 45.00The bike frames could be produced with existing equipment and personnel. Manufacturing overhead is allocated to products on thebasis 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 $1.35 per WVD drum and $1.90 per 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 administrativeexpenses are fixed common costs, but it has been estimated that variable selling and administrative expenses amount to $.75 perWVD drum whether made or purchased and would be $3.10 per bike frame.All of the company's employees-direct and indirect-are paid for full 40.00-hour work weeks and the company has a policy of layingoff workers only in major recessions.

Accepted Answer

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