Storage Systems, Inc. specializes in the sale of various containers for the chemical industry, such as drums, bins, boxes, and other options. Among their offerings is the XSX drum, a durable metal drum built to withstand corrosion and store hazardous materials. The production of these drums is limited by the capacity of an automated welding machine utilized to create precise welds. This machine has an annual welding time capacity of 2,000 hours, enabling the manufacturing of 2,500 drums per year. Currently, the sole purpose of the welding machine is to produce XSX drums.
The accounting department has provided financial data for XSX drums. Management believes that if the company had enough manufacturing capacity, 3,000 XSX drums could be sold annually. To avoid adding another welding machine, management has explored the option of purchasing additional drum
...s from an outside supplier. Metal Products, Inc., a reputable supplier, can supply up to 1,800 XSX-type drums per year at a cost of $120 per drum. Storage Systems would then resell these drums to its customers at the regular selling price after appropriate relabeling.
Jasmine Morita, the production manager of Storage Systems, proposes utilizing the welding machine more efficiently by producing premium mountain bike frames. These frames would only require 0.2 hours of welding time per frame. Jasmine is confident that Storage Systems could sell up to 3,500 mountain bike frames per year to mountain bike manufacturers at a price of $65 per frame. The accounting department has confirmed that the proposed new product can be manufactured using the current equipment and personnel.
Manufacturing overhead is distributed to products based on the number of direc
labor- hours they require. The majority of manufacturing overhead includes fixed common costs like rent for the factory building, with a portion being variable. The variable manufacturing overhead costs have been approximated at $1.05 per XSX drum and $0.60 per mountain bike frame. However, the variable manufacturing overhead cost would not apply to drums obtained from an external supplier. Selling and administrative expenses are assigned to products according to their revenues.
The majority of selling and administrative expenses are fixed common costs. It has been determined that variable selling and administrative expenses amount to $0.85 per XSX drum and $0.40 per mountain bike frame. The $0.85 per drum arises when the company sells drums acquired from an external supplier to its customers. All employees, whether direct or indirect, are paid for a full 40-hour workweek. The company only lays off workers during major recessions.
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