Lynn Harris is a management accountant at Smith Corporation. Smith is under inte
ID: 2500064 • Letter: L
Question
Lynn Harris is a management accountant at Smith Corporation. Smith is under intense cost competition. Harris has been asked to evaluate whether Smith should continue to manufacture MTR-2000 or purchase it from Jones Company. Jones has submitted a bid to supply the 32,000 MTR-2000 units that Smith will need for 2015 at a price of $17.30 each. Smith has capacity available to produce 32,000 units.
From plant records and interviews with John Simpson, the plant manager, Harris gathered the following information regarding Smith’s costs to manufacture 30,000 units of MTR-2000 in 2014:
Cost for 30,000 units in 2014
Direct Materials
$195,000
Direct Manufacturing Labor
120,000
Plant Space Rental
84,000
Equipment Leasing
36,000
Other Manufacturing Overhead
225,000
Total manufacturing Costs
$660,000
Additionally, Simpson tells her that:
Variable costs per unit in 2015 will be the same as variable costs per unit in 2014.
Plant rental and equipment lease are annual contracts that are going to be expensive to wiggle out of. Simpson estimated it will cost $10,000 to terminate the plant rental contract and $5,000 to terminate the equipment-lease contract.
40% of the other manufacturing overhead is variable, proportionate to the direct manufacturing labor costs. The fixed component of other manufacturing overhead is expected to remain the same whether MTR-2000 is manufactured by Smith or outsourced to Jones.
Smith’s just-in-time policy means that inventory is negligible.
Harris is aware that cost studies can be threatening to current employees because the findings may lead to reorganizations and layoffs. She knows that Simpson is concerned that outsourcing MTR-2000 will result in some of his close friends being laid off. Therefore, she performs her own independent analysis of competitive and other economic data, which reveals that:
Prices of direct materials are likely to be higher by 8% in 2015 compared to 2014.
Direct manufacturing labor rates are likely to be higher by 5% in 2015 compared to 2014.
The plant-rental contract can, in fact, be terminated by paying $10,000. Smith will not have any need for this space if MTR-2000 is outsourced.
The equipment lease can be terminated by paying $3,000.
Harris shows Simpson her analysis. Simpson argues that Harris is ignoring the amazing continuous improvement that is occurring at the plant and that increases in direct material prices and direct manufacturing labor rates assumed by Harris will not occur. But Harris is very confident about the accuracy of the information she has collected.
Required:
On the basis of the material and labor cost estimates originally compiled with Simpson’s help, should Harris recommend that MTR-2000 be produced at Smith or purchased from Jones? Show your calculations.
On the basis of Harris’s own independent estimates, should she recommend that MTR-2000 be produced or purchased? Show your calculations.
What other factors should Harris examine before recommending whether Smith should manufacture or buy MTR-2000? Include in your discussion any applicable standards from the IMA Statement of Ethical Professional Practice.
What should Harris do in response to Simpson’s inputs and comments?
Cost for 30,000 units in 2014
Direct Materials
$195,000
Direct Manufacturing Labor
120,000
Plant Space Rental
84,000
Equipment Leasing
36,000
Other Manufacturing Overhead
225,000
Total manufacturing Costs
$660,000
Explanation / Answer
Answer 1.) Comaprison of cost between outsourced & self manufacturing
As per discussion with simpson Company should make MTR 2000
Answer -2
Comaprison of cost between outsourced & self manufacturing on the basis of Harris own estimate.
On the basis of Harris estimate company should out source the MTR - 2000.
Answer -3, Harris as per IMA standards of ethics should present his analysis before management. However his own analysis in favor of outsourced the MTR-2000. But Manufacturing cost & out sourceing cost have not much difference, So she request to management that company should manufacture the MTR -2000. It will save the job of the employees. Employess will try to reduce the labor cost and improve their performance.
Answer - 4 Harris should tells the Simpsons for accuracy of her data. Harris should try to satisfiy theSimpsons that she will best try to save the jobs of the employees. She is not aginst the employees but she can not produce the wrong report before management. She request the management to shift the employees in other department if Managemnet will take decision of outsourced the MTR 2000.
Particulars MTR2000 make MTR 2000 outsourced Unit 32000 32000 Out sourced Cost @17.30 0 553600 Direct material (195000/30000*32000) 208000 0 Direct Mfr labor (120000/30000*32000) 128000 0 Plant Space rental 84000 10000 Equipment Leasing 36000 5000 Other mfr overhead Variable (225000*40%/120000*128000) 96000 0 Fixed (225000*60%) 135000 135000 Total cost 687000 703600Related Questions
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