425 Part Two Planing ond Decision Making No marketing costs would be associated with the special order Since the order would be used research and consistency is eitical, APAC requires that GGI il the entire onder of 5,000 bags, Required 1. What is the total relevant cost of filling tis special -sales order? 2, What would be the change in operating income if he special order i cospted? 3. What sth breakeven selling pic pr unit forthe special soles order (thats, wha the sling price tat would reselt in zero effect on opeatng income)? 4, Prepare comparative income sttements, contribution format, for both the current situation and assuming 4 the special otderiseccpted at the breakeven price determined in requirement 3 above. 5. Suppose tha after GGL accep the special ore, it finds that unexpected production delays wl not allow * itt supply al 5,000 units from its on plants and meet the promised delivery date. Itcan provide the sume ‘material by purchasing them in bulk fom «competing fm. The materials would then be packaged in 4 GGL bags to complete the order. GG knows the compos miterals are very good quality, but itcamot ‘be sue thatthe quality meet its own exacting standards. Thee is not enough time to carefelly test the competitor’ proc o determine its quliry. What shoulé GGI do? [LO 11-2] 11-34 Special Order; ABC Costing (Continuation of Problem 11-28) Assume the same information as for Problem 11-35, except thatthe $12 fixed manufacturing overhead consists of $3 per unit batch. related costs (hati, costs that increase in total with the number of batches produced) and $9 per une facilities-level Fixed casts, Also, assume that each new batch causes increased costs of $1,000, per batch: the remainder ofthe batch-ievelcosis consists of tools and supervision labor that do not ‘vary wit the nomber of batches. The remainder of fixed costs do not vary with the numberof urits produced or the number of batches. Required 1. What is tbe total fixed manufacturing overhead cost forthe period? Break down tis ttl into is component pars, (int: You wil have o fine non incremental batch elated cots) j 2. Caleta be relevant unit and total cost of the speciat order, intuding the new information about | batch-oated css, | 3. Taceeptd, how would the special order affect GGs operating income? (Show calculations) {1011-21 11-95 Special Order; Strategy; Intenetional Williams Company, located in southern Wi ranufactuesa variety of indusiral valves and pipe fitings tha are sold to castomers in neaby V/_Stee Curent, the company is operating a bout 70% capaciy abd tearing a satiactogy return on investment Glogow Industries Lid. of Scotland has approsched management with an offer to boy 120,000 units ofa pressure valve. Glasgow Industies manufectues a valve tat is almost iden- tial to Williams's pressure valve; however, fie in Glasgow Indusress valve pant has hut down its manufacturing operations. Glasgow needs the 120,000 valves over the nest four ‘months to mest commitments to its regolar customers; the company i prepared to pay $21 cach forthe valves. Williams's product cost forthe pressure valve, based on cuent atinable standards is @ Direct materials $6 Diractiabor (05h per valve) 8 ‘Menufacturing overhead (13 variabla) 3 Total manufacturing cost aa Aaditional costs incurred in connection with sales ofthe pressure valve are sales commissions of, ‘5% and freight expense of SI per unt. However, the company doesnot pay sales commissions on special ‘orders that come directly o management. Freight expense will be paid by Glasgow. ‘In determining selling prices, Williams adds a 40% markup to product cost. Ths provides a $32 suggested selling price for the pressure valve. The marketing department, however, bas set the cur- rent selling price at $30 co maintain marketshare ‘Production management believes tha itcan handle the Glasgow Industries order without disrupt= in its scheduled production. The order would, however, require additional fixed factory overhead of {$12,000 per month in the form of supervision and clerical cost. ‘management accepts the order, Williams will manufecture and ship 30,000 pressure valves to Glasgow Industries each month fo the next four months. Shipments will be made in weekly con- signments, FOB shipping point.(Chapter 11 Decision Making with aSiratege Emphasis 27 fend 1 — ‘how many additional direct labor hours will be required each month to fill the Glasgow order. 2. epee a aml shoring te input on prune poss of ceepng he low ner 3. Coc mmr pie Willan management culd cp ri Cg eer th Cotten opeag mene Use he od Se ett El eke te nino an sling pie you eed above uienent3 Suppose now Oat be sige or were ep ls 000 ui pr moh oes cx oul rede sling pc of 30 pr lee las eo pe nts Pele Wats te evel reeves ling pce pr fr be Glasgow sper desea? iene rag cori Wins sul ener before eprint lego er enh facto ele oir! ses hat Wiss concer fore rpg he Gig oer (CMA Adapted) « nr ee pte res. is sec ec wereaantoe etme ncomnare lege lire Seling price per unit $7.00 Costs per unit: Electric motor $800 Other parts 800 Direct labor ($15/hr) 1500 Manufacturing overhead 1500 Seling and administrative cost 20.00 Profitper unit Required 1. Assuming Martens plan to meet the expected demand for 20,000 atic fans, how many should it manufacture and how many should ic purchase from Hanis Products? Explain your reasoning with calculations. 2 Independent of requirement 1 above, assume that Beth Johnson, Martens's product manager, hes sug gested that the company could make better use of is fan department eapacity by manufecturing marine pumps instead of fans. Johnson believes that Martens could expect to use the prodvetion capacity to ‘produce and sell 25,000 pumps annually 2a price of $60 per pump. Johnson's estimate of the costs to ‘manafacture the pumps is presented below. If Johnson's suggestion is not accepted, Martens would sell 20,000 atic fans instead. Should Martens manufacture pumps or atte fens? Information onthe sales price and costs forthe marine purnps fellows. Seling rice per pump $80.00 Cost per uit Bectie motor Other paris 3.00 Direc labor sth) 750 Manufacturing overhoad 00 Seling and edministrative cast ma00 Profit per ump 23. What are some ofthe long-term considerations in Martens's decisions in requirements 1 and 2 above?428 PartTwWo Planning and Decision Making pt (L011) 11-37 Make or Buy; Stategy;Ethies The Midwest Division ofthe Paibec Corporation manufactures 414 subassemblies used in Paibec's final produets. Lynn Hardt of Midwest's profit planning depart = ‘meat has been assigned the task of determining whether Midwest should continue to manufac- ture a subassembly component, MTR-2000, or purchase it from Marley Company, an ouside supplier, Marley has submited & bid to manufacture and supply the 30,000 units of MTR-2000 that Paibee will need for 2016 at a per-unie price of $20.00. Marley bas assured Paiber thatthe units will be delivered according to Paibec’s production specifications and needs, The contract, price of $20.00 is applicable only in 2046, but Marley is interested in entering into a long-term arrangement beyond 2016, Lyn has submitted the following information regarding Midwest's costo manufacture 25,000, units of MTR-2000 in 2015: Direct materials $168,750 Direct labor 100,000 Factory space rental 150,000 Equipmentleasing costs 45.000 Other manufacturing costs 250,000 Total manufacturing costs ; Lynn has collected the following information related to manufacturing MTR-2000: ‘+ Equipment leasing costs represen special equipment used to manufacture MTR-2000. Midwest can i terminate this lease by paying the equivalent of one month's lease payment for each of the two years left on its lease agreement. + Fony percent ofthe osher manufacturing ovecheadis considered varible, Variable overhead changes ‘withthe number of units produced, and ths rate per unit isnot expected to change in 2016. The fixed manufacturing overhead costs are not expected to change whether Midwest manufactures ‘or purchases MTR-2000, Midwest can use equipment other than the leased equipment ints other 5 ‘manufacturing operations. { + Direct materials cost used in the production of MTR-2000 is expected to increase 1% in 2016. + Midwest's direct labor contract calls for a 4% wage increase in 2016, +The facilites used to manufactore MTR-2000 are rented under a month-io-month rental agree~ rent, Midwest would have no need for this space if it does not manufacture MTR-2000, Thus, Midwest can withdraw from the rental agreement without any penalty John Porter, Midwest divisional manager, stopped by Lynn's office to voice his opinion | regarding the ouisourcing of MTR-2000. He commented, “I am really concerned about out sourcing MTR-2000. Ihave & son-in-law and a nephew, not to mention a member of our bow!- ing team, who work on MTR-2000. 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 shows that ‘we should continue making MTR-2000. Corporate is not aware of materials cost increases and maybe you can leave out Some of those fixed costs. I just think we should continue making MTR-2000." Required f 1, Prepare a relevant cost analysis that shows whether the Midwest Division should make MTR-2000 or purchase it from Marley Company for 2016, 2. ent and briefly discuss the strategic factors that Midwest should consider in this decision 3, By referring to the specific ethical standards for management accountants outlined in Chapter 1, assess the ethical issues in John Porter's request of Lynn Hardt (CMA Adapteay LOT, 11-5) 11-38 Outsour ‘operating in 634 locations in the Southeast United States. Until 2005, the bank operated a call = center for customer inquiries out ofa single location in Atanta, Georgia. MB understood the “ 19 Call Centers; Strategy; Ethics Merchants’ Bank (MB) is « large regional bank {importance of the eall center for overall customer satisfaction and made sure that the center was maneged effectively. However, in early 2004, it became clear that the cost of running the center 15 ‘was increasing very rapidly, along with the firm's growth, and that some issues were arising about che quality of the service. To improve the quality and dramatically reduce the cost of the service, MB moved its call center to Bangalore, India, to be run by an experienced outsourcing firm, Naftel, which offers similar services to other banks like MB, eS