Myers Manufacturing INTRODUCTION The vice president at your company, Dunking Holdings, has given you a new assignment: "Recently I asked the folks at MyersManufacturingtodevelopa strategy for improving their profitability. They have responded with a proposal. I want you to evaluate the proposal:Is it viable? Is it sustainable?Visit their operations and bring back a recommendation." As you travel to the site you review a brief history of the firm. Myers Manufacturing was founded in a small city more than a century ago.Ivan Myers started the firm alongside a fast-moving stream that provided mechanical power to drive cutting tools, grinders, lathes, and polishers.These tools were used to produce precision parts other manufacturers needed. The firm quickly established a reputation for producing high-quality products to exacting tolerances. The firm prospered. Ivan studied the industries he served to develop new products that could fill his customers' emerging needs. He often met with customers to design unique products for them. He referred to his approach as providing "customer driven creative solutions." He also kept abreast of new manufacturing materials and technology to ensure his products were of the highest quality. The firm grew steadily and, by 1925,was (and still is)the community's largest employer. Ivan donated the land that is now the city's central park.He also paid for constructing the first municipal buildings. More recently, the company was the primary donor for the construction of the municipal library and the local hospital. And the taxes paid by the firm and its employees are responsible for an excellent array of community services, including the Myers Sports Complex and Myers Community Center. The Great Depression in the 1930s brought hard times to the company, yet none of its employees were discharged. Instead,the firm and its employees cooperated to spread the available work among its employees by reducing each individual's working hours (and wages). During that time, the firm also suspended paying dividends to its owners. After the company returned to prosperity in the 1940s, it continued to emphasize customer-driven creative solutions, and its loyal work force enthusiastically overcame product design challenges. Ivan passed leadership of his business to his son, who later passed it down to Ivan's grandson, and then to Ivan's great granddaughter, Samantha Myers. But five years ago, when Samantha wanted to retire,there was no heir willing to take over the business. Consequently, the plant was sold to your employer, Dunking Holdings. BACKGROUND Dunking invests in family-owned businesses with a strong presence in niche markets. Dunking retains existing management and local business practices but provides centralized services, such as finance, accounting, insurance, and corporate-level management. Myers has remained profitable since the acquisition, but its return on investment has been declining. Your first stop at the Myers complex is a meeting with the controller.He provides some additional background: "Samantha, like her predecessors, spent most of her time with customers developing new products to meet customer needs. She didn't concern herself with costs. Customers were willing to pay for products that solved problems. Upon Samantha's retirement,Dunking appointed Mathieu, our former production manager, to CEO. Mathieu has done wonders in rationalizing and standardizing our product lines.He substantially reduced manufacturing costs, which led to record profits in the two years following the sale of the company. Those early results have apparently set high expectations for our continuing performance.Our proposal will help move us toward meeting those expectations," he said. "Our proposal is to stop manufacturing our largest-selling product, the Dredger Z28, and instead acquire it from an overseas supplier," continued the controller. "This product currently represents 30%of our total sales revenue and production volume. But sales have been declining because competitors are offering a similar product atlowerprices.We think that by reducing our price by 5% we can increase our unit sales volume by 15%. The increased volume coupled with a lower product cost from the offshore supplier should nearly double our firm-wide profit." The controller also provided some supporting documents.

Exhibit 1 summarizes operations for the five years since Myers Manufacturing was sold to Dunking Holdings. Year 1 represents the first full year after Samantha retired, and Year 5 is the year that just past. Exhibits 2, 3, and 4 provide an income statement for Year 5, the current employee staffing levels by job title, and a detailed price proposal from the overseas supplier. The controller continued: "The analysis is pretty straightforward. Sales of the Dredger Z28 were $27 million last year. The direct material costs came to $14.3 million,while overhead costs of $4.2 million were allocated to the product. But only $2.9 million of non-labor related overhead will be avoided if we stop manufacturing the Dredger Z28. The remaining overhead costs are nearly all fixed and not subject to reduction in the near future. Our direct selling costs consist mostly of an 8% commission paid to sales representatives.In addition,there's a $2 million advertising allowance devoted to promoting the Dredger Z28 in trade magazines." He also said, "By outsourcing the Dredger Z28, we can release three administrative managers,eight administrative support staff, 128 general production personnel, and 10 supervisors. The firm will incur a one-time charge of $1million for severance pay and pension contributions for dismissed employees.We'll also need to spend $200,000 for the construction of receiving facilities for the outsourced product." The controller continued: "The supplier's cost quotation (Exhibit 4) needs to be adjusted for the expected 15% increase in volume. The cost for materials and labor will increase proportionately, but the overhead and 'other' costs are unlikely to be affected. The supplier's mark-up will be 10% of the new total cost. In addition to the product cost, Myers will incur transportation costs to get the product from the manufacturer to our warehouse. The transportation costs are variable and would have been $0.6 million for the volume of product in Year 5." After his brief overview,the controller hands you the exhibits and says,"You should go through the numbers yourself to ensure that my projection for the increase in profit is correct." As you make your way to an empty office to review the numbers,the marketing manager approaches you. She pleads, "Don't let them outsource! The proposed action will deal a devastating financial blow to our community.Ivan Myers would have never approved such a move. He loved this town."

Exhibit 1: Myers Manufacturing Five-Year Summary of Operations (figures are copied from chart)

Year 5 Year 4 Year 3 Year2 Year1 Total Revenues $90.2 $94.9 $99.1 $106.2 $111.4 Net Income $3.1 $3.8 $4.4 $7.3 $7.5 Domestic Sales $74.7 $76.9 $79.3 $85.0 $88.1 International Sales $15.5 $18.0 $19.8 $21.2 $23.3 Sales of Established Products* $73.9 $75.1 $74.4 $76.3 $76.6 Sales of New Products* $16.3 $19.8 $24.7 $29.9 $34.8 Research and Development $0.9 $1.1 $1.5 $1.2 $1.3 Return on Assets 2.0% 2.3% 2.7% 4.1% 4.2% Number of Employees 480 485 502 492 510

Note: Dollar figures are in millions. *Established products are those that have been marketed for five years or more. New products have been marketed for less than five

Exhibit 2: Summary Income Statement for Myers Manufacturing

Year 5 Sales $90.2

Cost of Goods Sold (COGS) 74.3

Gross Margin 15.9

Administrative Costs 1.6

Selling Costs 11.2

Operating Income $ 3.1

Note: Dollar figures are in millions. Interest expense and income taxes are only shown on Myer's consolidated financial statements.

Exhibit 3: Distribution of Current Myers Employees by Job Title

Job Title Number of Average Salary Per

Administrative Manager 10 $45,000

Administrative Support Staff 24 32,000

Production Supervisor 29 50,000

General Production 417 37,000

Exhibit 4: Off-ShoreSupplier'sPriceProposalfortheVolumeof ProductinYear 5

Material Costs $12.7

Labor Costs 1.8

Overhead Costs 2.7

Other 1.5 Total 18.7

Profit Mark-Up(10%) 1.9

Total Price $20.6

NOTE: Dollar figures are in millions. The total price is quoted for supplying the quantity of product Myers sold in Year 5. The quoted price is FOB the supplier's manufacturing plant.

Please analize above facts and figures for arguments that support the following:

"Exhibit 1 summarizes operations for the five years since Myers Manufacturing was sold to Dunking Holdings. Year 1 represents the first full year after Samantha retired, and Year 5 is the year that just past. Exhibits 2, 3, and 4 provide an income statement for Year 5, the current employee staffing levels by job title, and a detailed price proposal from the overseas supplier. The controller continued: "The analysis is pretty straightforward. Sales of the Dredger Z28 were $27 million last year. The direct material costs came to $14.3 million,while overhead costs of $4.2 million were allocated to the product. But only $2.9 million of non-labor related overhead will be avoided if we stop manufacturing the Dredger Z28. The remaining overhead costs are nearly all fixed and not subject to reduction in the near future. Our direct selling costs consist mostly of an 8% commission paid to sales representatives.In addition,there's a $2 million advertising allowance devoted to promoting the Dredger Z28 in trade magazines." He also said, "By outsourcing the Dredger Z28, we can release three administrative managers,eight administrative support staff, 128 general production personnel, and 10 supervisors. The firm will incur a one-time charge of $1million for severance pay and pension contributions for dismissed employees.We'll also need to spend $200,000 for the construction of receiving facilities for the outsourced product." The controller continued: "The supplier's cost quotation (Exhibit 4) needs to be adjusted for the expected 15% increase in volume. The cost for materials and labor will increase proportionately, but the overhead and 'other' costs are unlikely to be affected. The supplier's mark-up will be 10% of the new total cost. In addition to the product cost, Myers will incur transportation costs to get the product from the manufacturer to our warehouse. The transportation costs are variable and would have been $0.6 million for the volume of product in Year 5." After his brief overview,the controller hands you the exhibits and says,"You should go through the numbers yourself to ensure that my projection for the increase in profit is correct."

Please provide calculations in supporting these arguments and any assumptions made.

calculate the cost of corporate social responsibility to the town if possible.