Reference no: EM132708009
Question - Maple Leaf processes and manufactures high quality maple syrup for distribution to secondary processors in the province of Ontario. Maple Leaf has a superior reputation as a premium producer of maple syrup in Ontario. As a result of years of wear and tear on the production line, a critical machine in the production process has begun to produce quality issues with the syrup product. Maple Leaf is considering replacing the old machine with a new machine, either the American made Super or the Quebec made Duper. The American manufacturer and the Quebec manufacturer have provided Maple Leaf with the following data on the estimated costs of operation of each machine brand at various levels of hours of operation:
|
Month
|
Hours
|
Super
|
Duper
|
|
January
|
4,400
|
$125,000
|
$160,000
|
|
February
|
2,900
|
97,000
|
120,000
|
|
March
|
32,840
|
280,000
|
300,000
|
|
April
|
8,150
|
180,000
|
200,000
|
|
May
|
16,352
|
225,000
|
260,000
|
|
June
|
61,700
|
438,000
|
368,000
|
The Canadian government provides tax credits to companies who buy manufacturing equipment within its borders, but the application process is complex and there are multiple criteria that must be met to take advantage of the tax credits.
The production supervisor has come to you, as the CFO, who is responsible for providing a report on which machine to purchase, to tell you that the quality issues are not that serious and would probably not be noticed by the customers. In addition, the downtime in the production line may affect the ability to deliver the customer orders on time. The production supervisor's bonus is partly based on the critical success factor of delivery times met. Your CEO is not yet aware of the quality issues that have been reported by quality control.
Required -
1. Use the high-low method to determine the cost equation for each brand of machine and use the results to calculate the costs of operating each machine if Maple Leaf's production hours are expected to be 25,000.
2. Using the high-low equation from 1, calculate the operating costs of each machine if Maple Leaf's hours are expected to be 40,000 and then for expected hours of 60,000.
3. If Maple Leaf's hours is expected to be 40,000 hours, which machine should it purchase? What about at 25,000 hours and at 60,000 hours? Is the high-low method useful here? Why or why not?
4. Identify any qualitative factors Maple Leaf should consider in their decision based on case facts?
5. Identify any ethical issues that would concern you if you were the CFO. How would you address them?
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