Landmark Corporation is a major automotive part manufacturer in North America. Due to the recent depressing automotive markets in North America, Landmark is looking actively in ways to reduce costs and improve profits. One of the options is to close down the Central Division which has been struggling and losing money.

Lynn Hardt is the new President of Central and she has been given the task to determine the best way of improving its performance. At the moment, Central utilizes all its current capacity to make one subassembly component ADT-1500. Its 2021 target is to show improvement in sales and also a minimum return on sales of 5%. Below is the cost to manufacture 30,000 units (full capacity) of ADT-1500 in 2020.

Direct Materials $ 195,000

Direct Labour $ 120,000

Factory Space Rental $ 84,000

Equipment Leasing Costs $ 36,000

Other Manufacturing Costs $ 225,000

Total Manufacturing Costs $ 660,000

Lynn has collected the following information relating to ADT-1500 :

Selling price per unit of ADT-1500 in 2020 is $ 19.50. The market is very competitive and it is unlikely that the price will go up in 2021.

Equipment leasing costs represent special equipment used to manufacture ADT-1500. Central can terminate this lease by paying the equivalent of one month's lease payment for each of the two years left on its lease agreement.

40 percent of other manufacturing overhead is considered variable. Variable overhead changes with the number of units produced, and this rate per unit is not expected to change in 2021. The fixed manufacturing overhead costs are not expected to change whether Central manufactures or purchases ADT-1500. Central can use equipment other than the lease equipment in its other manufacturing operations. There are 2 more years to go for the lease of the equipment.

Direct material costs used in the production of ADT-1500 is expected to increase 8 percent in 2021.

Central's direct labour contract calls for a 5 percent wage increase in 2021.

The facilities used to manufacture ADT-1500 are rented under a month-month rental agreement. Central would have no need for this space if it does not manufacture ADT-1500. Central can withdraw from the rental agreement without any penalty.

Lynn is currently also reviewing a few options :

A local supplier XYZ company has submitted a bid to Lynn to supply a maximum of 40,000 units of ADT-1500 that Central may need for 2021 at a unit price of $ 17.30. Central estimates that total sales potential for ADT-1500 is 50,000 units in 2021. XYZ has assured Lynn that the units will be delivered according to Central's production specifications and needs. The contract price of $ 17.30 is applicable only in 2021, but Lynn believes that she will need a long term arrangement beyond 2021 if she decides to take this alternative.

John Porter, Central Product Manager, stopped by Lynn's office to voice his opinion regarding the outsourcing of ADT-1500. He commented, "I am really concerned about outsourcing ADT-1500. I have a son-in-law and a nephew, not to mention a member of our bowling team, who works on ADT-1500. They could lose their jobs if we buy that component from XYZ. I really would appreciate anything you can do to make sure the cost analysis shows that we should continue making ADT-1500. 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 ADT-1500."

One of the largest automotive manufacturers, Xian Automotive in China has approached Central to produce a one time order of 25,000 units of MDT-2000. Due to the specialization of this production, this volume will take up all of Central's capacity in 2021. Xian is willing to pay $ 25 per unit for MDT-2000. In evaluating this option, Lynn estimates that the raw material will cost $ 8 per unit. The labour cost per unit will remain the same as the current production. Variable overhead is a function of the labour costs. They can use the same equipment (including the leased equipment) but the space can be cut into half. Xian indicated that this could turn into a long term contract if the performance of the first order is satisfactory.

Required :

Adopt the role of Lynn and do a report recommending a course of action the company should take.