Solution #1

Because the company pays fixed 40 hours per week for all employees, the direct labour is fixed cost a thus it should not be included in the comparison for margin. This means the margin as calculated by the accounting team has potentially wrong data in determining which one to consider producing. The resource constraint appears to be the weilding machine and we can use that information to determine which one one to produce.

Solution #2
Contribution Margin per unit

Purchased XSX Manufatured XSX drums drums

Saling price per unit Variable expense Direct Materials Var Manufacturing overhead Selling and Admin cost Total Contribution Margin $154.00 $154.00

$120.00 $0.00 $0.85 $120.85 $33.15

$44.50 $1.05 $0.85 $46.40 $107.60

Solution #3
Given wielding time is thekey resource constraint for both mountan bike frame and the XSX drums. margin per weilding time to determine if we should go for producing mountain bikes or nor not.

Contribution Marigin from current 2500 XSX drums is 2500 * $107.60 = $269000.00 Now we need to determine the net contribution margin if we add mountain bike and buy, But first we need to find out if we should produce mountain bikes. To do this we need to determine contribution margin per weilding time because that is the constraine Given 2000 hours of weilding time available per year. Mountain bikes XSX Drums Contribution margin as in Solution #2 $46.50 $107.60 Given weilding hours per unit 0.20 0.80 CM per Constrained resource per 46.50/0.20 = $232.50 hour 107.60/0.80 = $134.50

The above CM per weilding hours indicate, mountain bikes are the best margin in using the automate So, the company should produce mountain bikes

Given they want to produce 3500 mountain bikes per year, we need to use the weilding machine for t 3500 mountain bikes will use only 3500 * .02 = 700 hours of machine But given we have 2000 hours per year, so we can use the remainig 1300 hours for XSX drums. so, for 1300 hours, we can produce 1300 /0.8 = 1625 XSX drums But to meet the demand of 3000 XSX drums, we need to buy 3000 - 1625 = 1375 drums Now to calculate improvement to NET income, we can use the above numbers.

Contribution margin for Mountain bikes 3500 * $46.50 Contribution margin for XSX drums 1625 * $107.60 Contribution margin for purchased drums 1375 * $33.15 TOTAL Contribution Margin As calculated contribution margin in current production is =

= = =

Increase in net income will be

Solution #4
Redoing #2 and considering labor as a variable cost Contribution Margin per unit

Purchased XSX Manufatured XSX drums drums

Saling price per unit Variable expense Direct Materials Direct Labor Var Manufacturing overhead Selling and Admin cost Total Contribution Margin $154.00 $154.00

$120.00 $0.00 $0.00 $0.85 $120.85 $33.15

$44.50 $4.50 $1.05 $0.85 $50.90 $103.10

Redoing #3 and considering labor as a variable cost To determine contribution margin per weilding hour if labor is variable Contribution margin with 2500 is = 2500 * 103.10 = $257750.00 XSX drums 103.10 /.80 = Mountain bike 24.00/.20 = $128.87 per hour $120.00 per hour

Now, the contribution margin per weiling hours suggest, we should not produce mountain bikes. Thus we need to continue producing only XSX drums. so, to meet the 3000 demand, we need to buy 500 from the external partner. Contribution margin for XSX drums 2500 * $103.10 Contribution margin for purchased drums 500 * $33.15 TOTAL Contribution Margin As calculated contribution margin in current production is = = =

Increase in net income will be =

Solution #5

Direct labour in this case should be considered as fixed. This is because even if the company does no mountain bikes, they will continue to pay 40 hours per week salary to the labor force and thus the lab But we need to make sure that the labor hours are available for producing 3500 mountian bikes. Since we need 22.50 labor hours for one unit of mountain bike We need 22.50 /$18 per hour = 1.25 hours for one bike so total 3500 bikes will need 3500 * 1.25 hours = 4375 hours of labor In the current case, we have 2500 XSX drums which requires $4.50 direct labor / 18.00 per hour = 0.25 hour per XSX drum So, 2500 drums will be 2500 * 0.25 = 625 hours. so, in reality we will need more labor than what we have today. This means the company needs to hire more people when we have fixed direct labor.

the direct labour is fixed cost and s the margin as calculated ch one to consider producing.

Manufactured mountain bike frames

$65.00

$17.50 $0.60 $0.40 $18.50 $46.50

ke frame and the XSX drums. ountain bikes or nor not.

107.60 = $269000.00 ntain bike and buy, because that is the constrained resource

= $134.50

t margin in using the automated weilding machine.

use the weilding machine for that first as it's more cost effective

300 hours for XSX drums.

625 = 1375 drums numbers.

$162,750.00 $174,850.00 $45,581.25 $383,181.25 $269,000.00

$114,181.25

Manufactured mountain bike frames

$65.00

$17.50 $22.50 $0.60 $0.40 $41.00 $24.00

produce mountain bikes.

$257,750.00 $16,575.00 $274,325.00 $257,750.00

$16,575.00

se even if the company does not produce he labor force and thus the labor is not variable. cing 3500 mountian bikes.

ed direct labor.