Lynn Hardt, a management account ant with the Paibec Corporation, is evaluating whether a component, MTR-2000, should continue to be manufactured by Paibec or purchased from Marley Company, an outside supplier. Marley has submitted a bid to manufacture and supply the 32,000 units of MTR-2000 that Paibec will need for 2014 at a unit price of $17.30, to be delivered according to Paibec’s production specifications and needs. While the contract price of $17.30 is only applicable in 2014, Marley is interested in entering into a long-term arrangement beyond 2014.From plant records and interviews with John Porter, the plant manager, Hardt gathered the following information regarding Paibec’s costs to manufacture 30,000 units of MTR-2000in 2013:
Hardt has collected the following additional information related to manufacturingMTR-2000:
◆ Variable costs per unit in 2014 for the MTR-2000 are expected to be the same as variablecosts per unit in 2013.
◆ Plant rental and equipment lease are annual contracts that are going to be expensive to wiggle out of. Porter estimates 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 labour costs. The fixed component of other manufacturing overhead is expected to remain the same whether MTR-2000 is manufactured by Paibec or outsourced to Marley.
◆ Paibec’s just-in-time policy means inventory is negligible. Hardt 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 out-sourcing MTR-2000 will result in some of her 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 increase by 8% in 2014 compared to 2013.
◆ Direct manufacturing labour rates are likely to be higher by 5% in 2014 compared to 2013.
◆ The plant rental contract can, in fact be terminated by paying $10,000. Paibec will not have any need for this space if MTR-2000 is outsourced.
◆ The equipment lease can be terminated by paying $3,000.Hardt shows Porter her analysis. Porter argues that Hardt is ignoring the amazing continuous improvement that is occurring at the plant and that the increases in direct material prices and direct manufacturing labour rates assumed by Hardt will not occur. But Hardt is very confident about the accuracy of the information she has collected.
1. Based on the information Hardt has obtained, should Paibec make MTR-2000 or buy it? Show all calculations.
2. What other factors should Paibec consider before making a decision?
3. What should Lynn Hardt do in response to John Porter’s comments?

  • CreatedJuly 31, 2015
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