Behemoth Motors Corp. (BMC) is a major manufacturer of automobiles in the United States. BMC has decided to include a Global Positioning System navigator (GPSN) in all of its Sports Utility Vehicles (SUV) beginning with the 2011 model year. These models are just now being delivered and the GPSN units are manufactured in the Detroit BMC facility. Currently and for the foreseeable future, BMC will need 8,000 GPSNs per month. The total manufacturing cost of the GSPN is $425 per unit calculated as follows:
Cost per unit
Direct materials (purchased locally)
Direct labor (6 hours @ $28 per hour)
Factory Floor Space Charges (16,000 sq. ft. at $2.50 per sq. ft. per month allocated over 8,000 units per month)
Supervisory labor (monthly cost of $56,000 allocated over 8,000 units per month)
General company overhead ($640,000 per month assigned to GPSN allocated over 8,000 units per month)
Total Unit Cost
BMC experiences a high level of quality control over these units with only 2% of total production failing quality control testing. 98% of all units manufactured are installed in SUVs.
Wally Wizard, the GPSN manager, has been approached by Far East Enterprises, Ltd (FEE) who has offered to outsource these units for MBC. FEE is a three-year-old electronic manufacturing company located in China and has experienced outstanding growth during that three-year period. FEE has offered to manufacture and deliver to Detroit 8,000 GPSN units at a unit cost of $400 beginning on Jan. 1, 2011. FEE asks for a two-year contract.
Under the existing arrangement, the direct materials are all purchased locally under month-to-month contracts. There are no future obligations under these contracts.
There are 100 direct labor employees involved in this process. These employees can be laid off but if they are, BMC must pay a penalty of $66,000 per year to the employees union. This penalty will continue for 4 years.
There are 10 supervisors, each earning $6,000 per month, assigned to the project. If the product is outsourced, all of these supervisors can be assigned to other supervisory positions within BMC.
If the product is outsourced, half of the factory floor space can be used for storage for materials that are currently stored in rented storage facilities. These rented facilities currently cost BMC $5,000 per month. There is no alternative use for the remaining factory floor space. The current $2.50 per sq. ft. charge is based on the overall BMC factory costs.
General company overhead is first assigned to operating units on the basis of total product produced and then further to produced units on a per unit basis. If the product is outsourced, this overhead will be reassigned to other operating divisions although total corporate overhead incurred will remain unchanged.
You have determined the following additional facts. The units manufactured by FEE will have the same quality as those manufactured by BMC and the delivery schedule will have the same reliability as that of BMC.
Case Assignment Task:
Make a recommendation to Wally Wizard in a 3 to 4 page response. Be sure to support your recommendation with the decision-making process outlined in the background information.
In general, future costs that are different between or among decision alternative options are relevant to those decisions.
Here are the typical steps in using accounting information in making a decision.
a. Clearly define the decision to be made. This includes identifying the options (always 2 or more) available to the decision-maker. Sometimes, the options are to take or not to take a particular action.
b. Identify all costs that related to any of the options. This includes past, future, and opportunity costs.
c. Determine which of these costs to not differ among any of the options available to the decision-maker and eliminate those costs from the decision process.
d. Analyze the remaining costs, as they are relevant to the decision. The initial decision should favor the option with the lowest relevant costs.
e. Consider any qualitative factors that relate to the decision and modify the decision as necessary.
For multi-national these additional factors are relevant.
a. Foreign currency translation changes.
b. Difference in tax laws between countries.
c. Stability of governments in related countries.
d. Reliability and quality of work force.
e. Reliability of sources and quality of materials.
f. Reliability of transportation and communication.
Now work your way through the following two references:
Jay, B., (2004). Relevant costs for decision-making, Retrieved Nov. 15, 2010 from: http://www.accountancy.com.pk/articles_students.asp?id=142
Vance, David E. (2003). Financial Analysis & Decision Making, Chapter 11, McGraw-Hill