Tactical Decision Making

PROBLEM 19.45 (40 minutes) Outsourcing decision; relevant costs; ethics: manufacturer

1. (a) An analysis of the relevant costs that shows whether the Victorian Division of HMC should make JY-65 or purchase it from Marley Company is as follows:

Amount

per unit

Total for

32 000 units

Cost to purchase JY-65 from Marley:

вЂÑ"Bid price from Marley

$8.65

276 800

вЂÑ"Equipment lease penalty ($18 000/12) п‚Ò' 2

   3 000

вЂÑ"Total cost to purchase

$279 800

Cost for Victorian to make JY-65:

вЂÑ"Direct material ($97 500/30 000) п‚Ò' 1.08

$3.51

$112 320

вЂÑ"Direct labour ($60 000/30 000) п‚Ò' 1.05

2.10

67 200

вЂÑ"Variable manufacturing overhead ($112 500 п‚Ò' .4)/30 000

1.50

48 000

вЂÑ"Factory space rental

42 000

вЂÑ"Equipment leasing costs

  18 000

вЂÑ"Total cost to make

$287 520

Cost savings if purchased from Marley

$ (7 720)

(b) Based solely on the financial results, the 32 000 units of JY-65 should be purchased from Marley. The total cost from Marley would be $279 800, or $7720 less than if the units were made by the Victorian Division.

2. The qualitative factors that the Victorian Division and HMC Corporation should consider before agreeing to purchase JY-65 from Marley Company include the following:

• The quality of the Marley component should be equal to, or better than, the quality of the internally made component, or else the quality of the final product might be compromised and HMC’s reputation adversely affected.

• Marley’s reliability as an on-time supplier is important, since late deliveries could hamper HMC’s production schedule and delivery dates for the final product.

• Layoffs may result if the component is outsourced to Marley. This could impact Victorian’s and HMC’s other employees and cause labour problems or affect the company’s position in the community. In addition, there may be termination costs that have not been factored into the analysis.

3. Lynn Hardt would consider the request of John Porter to be unethical for the following reasons, which are based on the Standards of Ethical Conduct for Management Accountants.

Competence

• Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information. He has asked her to adjust and falsify her report and leave out some manufacturing overhead costs.

Integrity

• Refrain from either actively or passively subverting the attainment of the organisation’s legitimate and ethical objectives. HMC has a legitimate objective of trying to obtain the component at the lowest cost possible, regardless of whether it is manufactured by Midwest or outsourced to Marley.

• Communicate unfavourable as well as favourable information and professional judgments or opinions. Hardt needs to communicate the proper and accurate results of the analysis, regardless of whether or not it is favourable to Victoria.

• Refrain from engaging in or supporting any activity that would discredit the profession. Falsifying the analysis would discredit Hardt and the profession.

Objectivity

• Communicate information fairly and objectively. Hardt needs to perform an objective make-versus-buy analysis and communicate the results fairly.

• Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented. Hardt needs to fully disclose the analysis and the expected cost increases.

PROBLEM 19.52 (25 minutes) Special order: manufacturer

1. The manufacturing overhead rate is $18.00 per