The New South Wales Division of Sansuki Motor Corporation (SMC) manufactures sub-assemblies that are used in their final products. Lynn Hardt of the New South Wales Division's Profit Planning Department has been assigned the task of determining whether a component, JY-65, should continue to be manufactured by the New South Wales Division or purchased from Marley Company, an outside supplier. JY-65 is part of a sub-assembly manufactured by the New South Wales Division.

Marley has submitted a bid to manufacture and supply the 32 000 units of JY-65 that the New South Wales Division will need for next year at a unit price of $17.30. Marley has assured SMC that the units will be delivered according to SMC's production specifications and needs. While the contract price of $17.30 is only applicable to next year, Marley is interested in entering into a long-term arrangement.

Hardt has gathered the following information regarding the New South Wales Division's costs to manufacture JY-65 in the current year. These annual costs will be incurred to manufacture 30 000 units.

Direct material.......................................$195 000

Direct labour ........................................ 120 000

Factory space rental ................................ 84 000

Equipment leasing costs ........................... 36 000

Other manufacturing costs ........................ 225 000

Total manufacturing costs...........................$660 000

Hardt has collected the following information related to manufacturing JY-65-

• Direct materials used in the production of JV-65 are expected to increase by 8 percent next year.

• The New South Wales Division's direct-labour contract calls for a 5 percent increase next year.

• The facilities used to manufacture JY.65 are rented under a month-to-month rental agreement. Thus, the New South Wales Division can withdraw from the rental agreement without any penalty. The Division will have no need for this space if JY-65 is not manufactured.

• Equipment leasing costs represent special equipment that is used in the manufacture of JY-65. This lease can be terminated by paying the equivalent of one month's lease payment for each year left on the lease agreement. New South Wales has two years left on the lease agreement, from the beginning of next year

• Forty per cent of the other manufacturing overhead is considered variable. Variable changes with the number of units produced. and this rate per unit is not expected to change next year. The fixed manufacturing overhead costs are not expected to change regardless of whether JY 65 is manufactured or not. Equipment other than the leased equipment can be used in the New South Wales Division's other manufacturing operations.

John Porter, the manager of the New South Wales Division, stopped by Hardts office to voice his concern regarding the outsourcing of JY-65. Porter commented:

I am really concerned about outsourcing JY.65. I have a son-in-law and a nephew, not to mention a member of our bowling team, who work on JVó5. They could lose their jobs if we buy that component from Marley. I really would appreciate anything you can do to make sure the cost analysis comes out right to show we should continue making JY-65. Corporate is not aware of the material increases and maybe you could leave out some of those fixed costs. I just think we should continue making JY-65!

Required:

1. (a) Prepare an analysis of relevant costs that shows whether or not the New South Wales Division of SMC should make JY-65 or purchase it from Marley Company next year.

(b) Based solely on financial results, recommend whether the 32 000 units of JY-65 for next year should be made by the New South Wales Division or purchased from Marley

2. Identify and briefly discuss three qualitative facha the New South Wales Division and SMC should consider before agreeing to purchase JY-65 from Marley Company.

3. By referring to the standards of ethical conduct for managerial accountants described in Chapter 1, explain why Lynn Hardt might consider the request of John Porter to be unethical.