Make versus buy, ethics. (CMA, adapted) Lynn Hart is a management accountant at Paibec Corporation. Paibec is under intense cost competition. Hart has been asked to evaluate whether Paibec should continue to manufacture MTR-2000 or purchase it from Marley Company. Marley has submitted a bid to supply the 32,000 MTR-2000 units that Paibec will need for 2009 at a price of $17.30 each. Paibec has capacity available to produce 32,000 units. From plant records and interviews with John Porter, the plant manager, Hart gathered the following information regarding Paibec’s costs to manufacture 30,000 units of MTR-2000 in 2008:

Additionally, Porter tells her that:

• Variable costs per unit in 2009 will be the same as variable costs per unit in 2008.
• 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 t- 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 Paibec or outsourced to Marley.
• Paibec’s just-in-time policy means that inventory is negligible.

Hart is aware that cost studies can be threatening to current employees because the findings may lead reorganizations and layoffs. She knows that Porter is concerned that outsourcing MTR-2000 will result some of his close friends being laid off. Therefore, she performs her own independent analysis of completive and other economic data, which reveals that:

• Prices of direct materials are likely to be higher by 8% in 2009 compared to 2008.
• Direct manufacturing labor rates are likely to be higher by 5% in 2009 compared to 2008.
• The plant-rental contract can, in tact, 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.

Hart shows Porter her analysis. Porter argues that Hart 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 Hart will not occur. But Hart is very confident about the accuracy of the information she as collected.

1. On the basis of the material and labor cost estimates originally compiled with Porter’s help, should Hart recommend that MTR-2000 be produced at Paibec or purchased from Marley? Show your calculations.

2. On the basis of Hart’s own independent estimates, should she recommend that MTR-2000 be produced or purchased? Show your calculations.

3. What other factors should Hart examine before recommending whether Paibec should manufacture or buy MTR-2000?

4. What should Hart do in response to Porter’s inputs and comments?

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Costs for 30,000 units in 2008 Direct materials Direct manufacturing labor Plant space rental Equipment leasing Other manufacturing averhead Total manufacturing costs $195,000 120,000 84,000 36,000 225,000 $660,000