Reference no: EM132612241
Lynn Hardt, a management accountant with the Paibec Corporation, is evaluating whether a component MTR-2000 should continue to be manufactured by Paibec or purchased from Marley Company. Marley has submitted a bid to manufacture and supply the 32,000 units of MTR-2000 that Paibec will need for 2020 at a selling price of $17.30.
Hardt has gathered the following information regarding Paibec's costs to manufacture 30,000 units of MTR-2000 in 2019:
Direct materials $195,000
Direct manufacturing labour 120,000
Plant space rental 84,000
Equipment leasing 36,000
Other manufacturing overhead 225,000
Total manufacturing costs $660,000
Hardt has also collected the following information related to manufacturing MTR-2000:
- Prices of direct materials used in the production of MTR-2000 are expected to increase by 8% in 2020.
- Paibec's direct manufacturing labour contract calls for a 5% increase in 2020.
- Paibec can withdraw from the plant space rental agreement without any penalty. Paibec will have no need for this space if MTR-2000 is not manufactured.
- The equipment lease can be terminated by paying $6,000.
- 40% of the other manufacturing overhead is considered variable. Variable overhead changes proportionately with the number of units produced. The fixed component of other manufacturing overhead costs is expected to remain the same whether or not MTR-2000 is manufactured.
- John Porter, plant manager at Paibec Corporation, indicates to Hardt that the current performance of the plant can be significantly improved and that the cost increases she is assuming are unlikely to occur. Hence, the analysis should be done assuming costs will be considerably below current levels. Hardt knows that Porter is concerned about outsourcing MTR-2000 because it will mean that some of his close friends will be laid off.
- Hardt believes that it is unlikely that the plant will achieve the lower costs Porter describes. She is very confident about the accuracy of the information she has collected, but she is also unhappy about laying-off employees.
Required:
Question (a) On the basis of the financial information Hardt has obtained, should Paibec make MTR-2000 or buy it in 2020? Show your calculations.
Question (b) What other factors should Paibec consider before making a decision?
Question (c) Explain the statement "All Future costs are not relevant but all relevant costs are future costs". Use examples as necessary.
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