Essay Final Case Study (Managerial Accounting)
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 2,000 hours of welding time are avail-able annually on the machine. Since each drum requires 0.8 hours of welding time, annual production is limited to 2,500 drums. At present, the welding machine is used exclusively to make the XSX drums. The accounting department has provided the …show more content…
4. Redo requirements (2) and (3) making the opposite assumption about direct labor from the one you originally made.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.
5. What do you think is the correct way to treat direct labor cost in this situation—as variable or as fixed? Explain.
1 XSX Drums Mountain Bike Frames Margin per unit $86.45 $2.75 Possible Production* 2,500 10,000 Annual Demand 3,000 3,500 Operating income** 216,125 9,625
*2000/0.8=2500 units; 2000/0.2=10,000 units;
**Margin per unit x available for sale: 86.45x2500=$216,125 2.75x3500=$9,625
Based on the margin of the two products,