Hi, dear tutor.

i have some doubts about this case:

1. What is the business, processes, costing systems and strategy of Cortland manufacturing company in this case?
2. How to find the problems and issues in this case?

I am looking forward to your reply.

This is the case of the information:

BACKGROUND:

CMI manufactured several different models of computers that it sold directly to hospitals and health systems

in all 50 states of the United States. The company prided itself on the user-friendly nature of its computers, and in particular on the ability of computers to facilitate graphical presentations. It was superb graphics that CMI claimed distinguished its computers from those of its competitors. Hospitals located the computers at nursing stations, and both nurses and physicians had found them invaluable to obtaining patient-related information on a real-time basis.

CMI purchased its raw materials in units that were made to its specifications. It used a single factory to manufacture all its computers. The factory workers operated three kinds of machines. Inspecting machines checked the raw materials and tested the components to assure that they met the company's specifications. Soldering machines then soldered various components together. Assembly machines put all the components together into finished products (which varied by computer model).

About 40 percent of CMI's manufacturing overhead was for depreciation, maintenance, and repairs on the inspecting, soldering, and assembly machines. The rest was in receiving and handling the raw materials, in adjusting the machines to set them up for each batch of computers, and in inspecting the finished computers and packing them for shipment. The actual manufacturing effort (inspecting, soldering, and assembly) was mainly automated, and CMI used little direct labor. The company also operated on a just-in-time (JIT) manufacturing basis, such that there were almost no inventories at the end of each month.

Most of the computers sold in large quantities. However, the Cortland 2000 did not. It represented a recent Ps 6: strategy effort by CMI to enter the scientific computing market by focusing on physicians who managed large research grants and needed sophisticated computing power in their laboratories and other research facilities. It was a state-of-the-art computer with several special features. In particular, it (a) used a new processing chip that the company imported from Sweden, (b) had special patented random access memory (RAM) that gave it extremely high input-output speeds, and (c) was manufactured in very small batches to assure uniform quality from one computer to the next.

FINANCIAL INFORMATION

CMI's budgeted direct-labor costs were $60 million. Based on expected sales, the company estimated that

its raw material purchases and use would total $300 million. Manufacturing overhead was budgeted at $196 million, and currently was assigned to each computer on the basis of machine hours. As indicated above, computers were priced at full production cost plus a markup of 50 percent.

Exhibit 1 shows the expected direct manufacturing cost for two of the company's computers. The Cortland 1000 was a very popular computer with a large production and sales volume. By contrast, the quantity of Cortland 2000s manufactured and sold was expected to be much lower than any of the company's other computers. Nevertheless, Mr. Works had thought that, when all manufacturing costs were considered, the Cortland 2000 would contribute a reasonable amount of money to CMI's selling, general, and administrative costs, and hence to the company's overall profits.

Mr. Works' concern had arisen because CMI's accountant had told him that he thought the company's

traditional product-costing system was providing misleading cost information. He had developed an analysis of the budgeted manufacturing overhead costs, shown in Exhibit 2. Data for the annual production of Cortland 1000 and Cortland 2000 computers are shown in Exhibit 3. Mr. Works commented:

I don't know quite what to make of all of these data. Clearly some analysis is called for. I guess what I really need is a sense of the true manufacturing cost of each of these computers. Even though we can't change the prices this year, we at least need to know if we're covering our full production cost on the Cortland 2000 and have something left to contribute to the company's selling, general, and administrative costs. I had thought this was the case, but now I'm not so sure.

Thanks

Hao (Vincent) Jiang