Make versus buy, ethics. (CMA, adapted) Lynn Hardt, a management accountant with the Paibec Corporation, is evaluating whether a component, MTR-85, should continue to be manufactured by Paibec or purchased from Marley Company, an outside supplier. Marley has submitted a bid to manufacture and supply the 32,000 units ofMTR-85 that Paibec will need for 2008 at a unit price of $19.03 to be delivered according to Paibec’s production specifica¬

tions and needs. While the contract price of $19.03 is only applicable in 2008, Marley is interested in entering into a long-term arrangement beyond 2008.

Hardt has gathered the following information regarding Paibec’s annual cost to manufacture 30,000 units ofMTR-85 in 2007.

Direct materials $214,500 Direct manufacturing labour costs 132,000 Plant space rental costs 92,400 Equipment leasing costs 39,600 Other manufacturing overhead costs 247,500 Total manufacturing costs $726,000 Hardt has collected the following additional information related to manufacturing MTR-85.

Direct materials used in the production ofMTR-85 are expected to increase 8% in 2008.

Paibec’s direct manufacturing labour contract calls for a 5% increase in 2008.

Paibec can withdraw from the plant space rental agreement without any penalty. Paibec will have no need for this space ifMTR-85 is not manufactured.

The equipment lease can be terminated by paying $6,600.

Forty percent ofthe other manufacturing overhead is considered variable. Variable overhead changes with the number of units produced. The rate per unit is not expected to change in 2008. The fixed manufacturing overhead costs are not expected to change whether or not MTR-85 is manufactured.

John Porter, plant manager at Paibec Corporation, is concerned that Hardt’s analysis may lead to the closing down of the MTR-85 line. Porter indicates to Hardt that the current performance of the plant can be significantly improved on and that the price 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-85 because it will mean that some of his close friends will be laid off. Furthermore, Porter had played a key role in convincing management to produce MTR-85 in-house.
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 unhappy about laying off employees.
Required 1. Based on the information Hardt has obtained, should Paibec make MTR-85 or buy it? Show all calculations.
2. What other factors should Paibec consider before making a decision?
3. What should Lynn Hardt do in response to John Porter’s comments?