managerial accounting

Future Technologies Inc. (FTI)

Future Technologies Inc. (FTI) manufactures small White-label electronic products, such as outdoor blue- tooth speakers, fitness watches, sports-timers, GPS products, and assorted other items. The company

choses the products it sells based on their sales potential and then estimates the costs for production. The company develops production plans, and then production begins. The company has been reasonably successful with their product choices and has only ever discontinued three products. White-label means that the products do not identify the manufacturers name to the customer but rather the name/labelling can be customized for each retailer that purchases it from FTI. One of the products it currently sells is an outdoor blue-tooth speaker. The speaker is meant to be placed in the garden and comes in models that look like rocks, artificial plants such as windmill palms and garden baskets. The company has struggled with this as the product needs to be protected from rain and sun. The blue-tooth speaker production process has never operated smoothly. The product is currently unprofitable, mainly because of warranty repairs and product recalls. Two models of the speakers were recalled, for example, because they sometimes caused an electric shock when switches were being turned on or off. The engineering department is trying to revise the manufacturing process, but the revision is estimated to take another five months. Initially, the speakers were very popular, and since they are a white-label product, the company reputation has not been affected from the problems. Presently, the company has a very large order for several products from a major big box chain with many locations. The overall order would be profitable for FTI however the order includes 6,000 of the blue-tooth speakers. When the company suggested that the big box chain purchase the speakers from another manufacturer, they threatened to cancel the entire order unless the speakers were included. The selling price of the speakers would be $14.50 per unit. The company has investigated the possibility of having another manufacturer make the speakers for it. Its pricing for the big box order was based on an estimated $12.30 cost to manufacture the speakers, broken down as follows: Electrical components, 1 each @ $2.00 =$2.00 Speaker components 1 each @ $4.00=$4.00 Plastic case, 1 each @ $0.80= $0.80 Switches, 1 @ $2.00 each=$2.00 Labour, 15 minutes @ $12/hour=$3.00 Overhead, $2.00 per labour hour=$0.50 FTI could purchase the speakers to fill the big box order for $15.40 from Diamond Products, a Chinese manufacturer. Diamond has a very good quality record to date and has offered to reduce the price to $12.90 after FTI has been a customer for six months and agrees to order at least 1,000 units per month.

If FTI becomes a "preferred customer" by purchasing 15,000 units per year, Diamond Products would reduce the price further to $9.90. Sound Products, a manufacturer located in the same city as FTI, has also offered to make speakers for FTI. They would provide 6,000 speakers for $10.40 each. However, Sound Products has been in business for only six months. The rumour in the business community is that the owners may face tax evasion charges soon and they have a history of high employee turnover. The owner of Sound Products is an experienced electronics engineer and therefore the quality of the speakers is likely to be good. If FTI decides to purchase the clocks from either Diamond Products or Sound Products, almost all of its current costs to manufacture the speakers could be avoided. The lone exception is $5,000 in fixed overhead costs for machine depreciation. The machinery is specialized and has no alternative use. Required: Bob Tully, the owner of Future Technologies Inc has approached you for consulting advice. Prepare a memo to Bob providing answers to the following questions: 1) What do you think FTI should do about the big box store order? 2) What should it do with regard to continuing to manufacture the Bluetooth speakers? Provide support for your answer including any calculations and advantages and disadvantages of any reasonable options. Include both quantitative and qualitative considerations.