Lynn Hart is a managerial accountant at Paibec Corporation. Paibec is under inte
ID: 2427232 • Letter: L
Question
Lynn Hart is a managerial accountant at Paibec Corporation. Paibec is under intense cost competition, and Hart has been asked to evaluate wwhether Paibec should continue to manufacture part MT-RF or purchase it from Marley Company. Marley has submitted a bid to supply the 36,000 MT-RF units that Paibec will need for 2011 at a price of $19.00 each. Paibec has capacity available to produce the 36,000 units.
From plant records and interviews with John Porter, the plant manager, Hart gathered the following information regarding Paibec's costs to manufacture 31,000 units of MT-RF in 2010:
Direct materials $192,200
Direct labor $111,600
Plant space rental $94,000
Equipment lease $37,000
Other overhead $235,600
Total $670,400
Additionall, Porter tells her:
*Variable costs per unit in 2011 will be the same as variable costs per unit in 2010.
*If MF-RF is purchased from Marley, plant space will not have to be rented, and equipment will not have to be leased. But these are annual contracts that are goign to be expensive to wiggle out of. Porter estimates it will costs $9,500 to terminate the plant rental contract and $5,500 to terminate the equipment lease contract.
*55% of the other overhead is fixed and is expected to remain the same whether MT-RF is manufactured by Paibec or outsourced to Marley. The varibale component of other overhead is proportional to production.
Hart is aware that cost studies can be threatening to current employees because the findings may lead to reorganizations and layoffs. She knows that porter is concerned that outsourcing MT-RF will result in some of his close frineds being laid off. Therefore, she performs her own independent analysis of competitive and other economic data, which reveals that:
*Direct materials and direct labor wage rates are likely to be higher by 9% and 3% respectively, in 2011 compared to 2010.
*The plant rental and equipment lease contracts can, in fact, be terminated by paying $7,500 and $3,500, respectively.
*Paibec can actually save $10,000 of the fixed portion of other overhead costs if MT-RF is purchased from Marley.
Based on Hart's estimates, by how much will Paibec's profits change if MT-RF is purchased from Marley? (Note: if the buy costs are less than the make costs, enter the different as a positive number; if the costs are less than the buy costs, enter the difference as a negative number.)
Explanation / Answer
Paibec's profits will change by $ (54,104) if MT-RF is purchased from Marley.
Make Buy $ $ Manufacturing costs: Direct materials cost (192,200 /31 x36) x 1.09 243,288 Direct labor cost (111,600 /31 x36) x 1.03 133,488 Variable overhead cost (235,600 x 0.45) / 31 x 36 123,120 Total variable cost 499,896 Avoidable fixed cost: Plant space rental 94,000 Equipment lease 37,000 Other overhead cost (fixed component) 10,000 Purchase cost @ $19 684,000 Contract termination costs 11,000 Total costs 640,896 695,000Related Questions
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