Refer to the original data given for Saturn Game Company in the preceding problem. An activity- based costing study has revealed that Saturn’s $ 300,000 of fixed costs include the following components:

Setup (40 setups at $ 800 per setup)................................... $ 32,000

Engineering (500 hours at $ 50 per hour)........................... 25,000

Inspection (1,000 inspections at $ 60 per inspection)......... 60,000

General factory overhead.................................................... 123,000

Total................................................................................... $240,000

Fixed selling and administrative costs................................ 60,000

Total fixed costs.................................................................$300,000

Management is considering the installation of new, highly automated manufacturing equipment that would significantly alter the production process. In addition, management plans a move toward just-in-time inventory and production management. If the new equipment is installed, setups will be quicker and less expensive. Under the proposed JIT approach, there would be 300 setups per year at $ 100 per setup. Since a total quality control program would accompany the move toward JIT, only 100 inspections would be anticipated annually, at a cost of $ 90 each. After the installation of the new production system, 800 hours of engineering would be required at a cost of $ 56 per hour. General factory overhead would increase to $ 332,200. However, the automated equipment would allow Saturn to cut its unit variable cost by 20 percent. Moreover, the more consistent product quality anticipated would allow management to raise the price of computer games to $ 52 per unit. (Ignore income taxes.)

Required:

1. Upon seeing the ABC analysis given in the problem, Saturn Game Company’s vice president for manufacturing exclaimed to the controller, “I thought you told me this $ 300,000 cost was fixed. These don’t look like fixed costs at all. What you’re telling me now is that setup costs us $ 800 every time we set up a production run. What gives?” As Saturn’s controller, write a short memo explaining to the vice president what is going on.

2. Compute Saturn’s new break- even point if the proposed automated equipment is installed.

3. Determine how many units Saturn will have to sell to show a profit of $ 280,000, assuming the new technology is adopted.

4. If Saturn adopts the new manufacturing technology, will its break- even point be higher or lower? Will the number of sales units required to earn a profit of $ 280,000 be higher or lower? (Refer to your answers for the first two requirements of the preceding problem.) Are the results in this case consistent with what you would typically expect to find? Explain.

5. The decision as to whether to purchase the automated manufacturing equipment will be made by Saturn’s board of directors. In order to support the proposed acquisition, the vice president for manufacturing asked the controller to prepare a report on the financial implications of the decision. As part of the report, the vice president asked the controller to compute the new break- even point, assuming the installation of the equipment. The controller complied, as in requirement (2) of this problem. When the vice president for manufacturing saw that the break- even point would increase, he asked the controller to delete the break- even analysis from the report. What should the controller do? Which ethical standards for managerial accountants are involved here?