The Mowerson Division of Brown Instruments manufactures testing equipment for the automobile industry. Mowerson’s equipment is installed in several places along an automobile assembly line for component testing and is also used for recording and measurement purposes during track and road tests. Mowerson’s sales have grown steadily, and revenue will exceed $ 200 million for the first time in 2001.
Mowerson designs and manufactures its own printed circuit boards (PCBs) for use in the test equipment. The PCBs are manually assembled in the Assembly Department, which employs 45 technicians. Because of a lack of plant capacity and a shortage of skilled labor, Mowerson is considering having the printed circuit boards manufactured by Tri- Star, a specialist in this field. Quality control restrictions and vendor requirements dictate that all PCBs be either manufactured by Mowerson or contracted to an outside vendor. The per-board cost of outside manufacture is higher than the in- house cost; however, management thinks that savings could also be realized from this change. Jim Wright, a recently hired cost analyst, has been asked to prepare a financial analysis of the outside manufacturing proposal. Wright’s report includes the assumptions he used in his analysis, along with his recommendation. His financial analysis appears next, and his notes and assumptions follow the analysis.
a. Discuss whether Jim Wright should have analyzed only the costs and savings that Mowerson will realize in 2002.
b. For each of the 10 items listed in Wright’s financial analysis, indicate whether
(i) The item is appropriate or inappropriate for inclusion in the report. If the item is inappropriate, explain why it should not be included in the report.
(ii) The amount is correct or incorrect. If the amount is incorrect, state what the correct amount is.
c. What additional information about Tri-Star would be helpful to Mowerson in evaluating its manufacturing decision?