Marysville Family Machinery Inc. (MFMI) is a family-owned engineering firm that contracted to supply 800 items to a new customer over the period of 30 days at a discounted per item price of $3500. MFMI must decide whether to overhaul the production machinery, since the machinery is 20 years old and the average number of items ever produced by factory per month was 350. Because the machinery is quite old, the cost of an overhaul is anticipated to be extremely high and as such the company has allocate a $1.5M budget for that purpose. Once the new machines are installed the old machinery can be sold to a scrap yard for $350,000. The failure rate with the existing machinery is estimated at about 3.5% of the total items produced and the firm estimates that the post- overhaul failure rate would decline to 2% (assume post overhaul production level of 600 units per month). Each defective item as a resulting from the machinery failure costs the firm $500 to manually finish.

Over the 20 year life of the company the number of employees at the various levels of output are indicated in the table below. The firm may choose to discontinue operations and sell its company as is, instead of retooling. In its current condition and based on market fundamentals, MFMI estimated that a discounted sale price would net sales proceeds of about $1.5 million.

Total overhead and total variable costs averaged $60,000 and $187,000 per month respectively.

ANSWER ALL QUESTIONS

A. A week before delivery, the customer indicated that it could only take 600 of the 800 items. Because of the long-standing relationship MFMI decided to accept this revised arrangement and mandate the sales team to sell the remaining 200 items in the market for at least $7000 per item. At the end of the period the sales team reported to management that they have identified buyers who were willing to purchase the 200 items at a rate of $6100 per item and at the management’s preferred price only 140 of the 200 would be sold.

i. Assumed that the sale team is correct, determine the quantity that would be sold if management agreed to a 5% reduction in their original price.

ii. Based on your response to part (ii), describe the type of demand for this item.

B. Assumes that the firm retools, would it make an accounting profit if the additional 200 units relating to this transaction are sold at the price recommended by the Sales Team?

C. As the Cost Accounting Officer, you were asked by the Managing Director to assess the options available to the firm, consider all factors at play and advise MFMI on how best to proceed. Your comprehensive analysis should include the following:

i. All relevant and necessary definitions, assumptions, and calculations including those relating to implicit and explicit costs, as well as accounting and economic profit.

ii. Evidence-based recommendations on whether to overhaul/retool the factory and continue in operations, do not retool but continue operating or the sell the company and exit the industry.

Answer rating: 100% (QA)

A i The price suggested by the management is 7000 and after reducing this amount by 5 the a... View the full answer