Lynn Hardt, a management accountant with the Paibec Corporation, is evaluating whether a component MTR-2000 would 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 of MTR-2000 that Paibec will need for 2003 at a selling price of $17.30 to be delivered according to Paibecs production specifications and needs. While the contract price of $17.30 is only applicable in 2003, Marley is interested in entering into a long-run arrangement beyond 2003.

Hardt has gathered the following information regarding Paibecs costs to manufacture 30,000 units of MTR-2000 in 2002:

Direct materials	$195,000
Direct manufacturing labor	120,000
Plant space rental	84,000
Equipment leasing	36,000
Other manufacturing overhead	225,000
Total manufacturing costs	$660,000

Hardt has also collected the following information related to manufacturing MTR-2000.

Prices of direct materials used in the production of MTR-2000 are expected to increase 8% in 2003.

Paibecs direct manufacturing labor contract calls for a 5% increase in 2003.

Paibec can withdraw from the plant space rental agreement without any penalty. Paibec will have no need for this space if MTR-2000 is not manufactured.

Paying $6,000 can terminate the equipment lease.

40% of the other manufacturing overhead is considered variable. Variable overhead changes with the number of units produced, but the rate per unit is not expected to change in 2003. The fixed manufacturing overhead costs are expected to remain the same whether or not MTR-2000 is manufactured.

John Porter, plant manager at Paibec Corporation, is concerned that Hardts analysis may lead to the closing down of the MTR-2000 line. Porter indicates to Hardt that the current performance of the plant can be significantly improved and that the cost 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-2000 because it will mean that some of his close friends will be laid off. Furthermore, Porter played a key role in convincing management to produce MTR-2000 internally.

Hardt believes that it is unlikely that the plant will achieve the lower costs Porter describes. She is confident about the accuracy of the information she has collected, but she is unhappy about the possibility of laying off employees.

Make versus buy, ethics required

1. On the basis of the information Hardt has obtained, should Paibec make MTR-2000 or buy it in 2003? Show your calculations.

2. What other factors should Paibec consider before making a decision?

3. What should Lynn Hardt do in response to John Porters comments?

Question 2 Optimal product mix 20 points

OmniSports Plastics Department is currently manufacturing 5,000 pairs of skates annually, making full use of its machine capacity. The selling price and total costs per unit associated with OmniSports skates are:

Selling price per pair of skates		$98
Costs per pair of skates
Molded plastic	$8
Other direct materials	12
Variable machine operating costs ($16 per machine hour	24
Manufacturing overhead costs	18
Marketing and administrative costs	21	83
Operating income per pair of skates		$15

OmniSport believes it can sell 8,000 pairs of skates annually if it had sufficient manufacturing capacity. Colcott Inc., a supplier of quality products, has agreed to provide up to 6,000 pairs of skates per year at a price of $75 per pair delivered to OmniSports facility.

Jack Petrone, OmniSports product manager, ahs suggested that the company can make better use of its Plastics Department by manufacturing snowboard bindings. Petrone believes that OmniSport could expect to sell up to 12,000 snowboard bindings annually at a price of $60 per binding. Petrones estimate of the selling price and total costs per unit to manufacture 12,000 bindings are:

Selling price per snowboard binding		$60
Costs per snowboard binding
Molded plastic	$16
Other direct materials	4
Variable machine operating costs ($16 per machine hour)	8
Manufacturing overhead costs	6
Marketing and administrative costs	10	44
Operating income per snowboard binding		$16

Other information pertinent to OmniSports operations includes the following:

In the Plastics Department, OmniSport uses machine-hours as the allocation base for manufacturing overhead costs. The fixed manufacturing overhead component of these costs for the current year is the $30,000 of fixed plantwide manufacturing over head that has been allocated to the Plastics Department. These costs will not be affected by the product-mix decision.

Variable marketing and administrative costs per unit for the various products are as follows:

Manufactured in-line skates$9

Purchased in-line skates 4

Manufactured snowboard bindings 8

Optimal product mix required

Calculate the quantity of each product that OmniSport should manufacture and/or purchase to maximize operating income in 2003. Show details of your calculations.