Phonetex is a medium-size manufacturer of telephone sets and switching equipment. Its primary business is government contracts, especially defense contracts, which are very profitable. The company has two plants: Southern and Westbury. The larger plant, Southern, is running at capacity producing a phone system for a new missile installation. Existing government contracts will require Southern to operate at capacity for the next nine months. The missile contract is a firm, fixed-price contract. Part of the contract specifies that 3,000 phones will be produced to meet government specifications. The price paid per phone is $300. The second Phonetex plant, Westbury, is a small, old facility acquired two years ago to produce residential phone systems. Phonetex feared that defense work was cyclical, so to stabilize earnings, a line of residential systems was developed at the small plant. In the event that defense work deteriorated, the excess capacity at Southern could be used to produce residential systems. However. just the opposite has happened. The current recession has temporarily depressed the residential business. Although Westbury is losing money ( $10,000 per month), top management considers this an Cist Afinarian- 7heary 317 and corapetent supervisars, engincers, asd shilled cratipooples Amother 20 persent of Wewhury' The plant manager at Weistbury has tried to convince hop manapemiere to shift the missie custrast phones over to his plant. Even thouph his ticed cont to manufactuee the plobes is higher than at Southern. he afgues that this will free u9 veme eccees capacity at Southem to adif more government work. The unit cour daca for the 3,000 poones ate as fodoms: + Bised ce dent lobor coetis Westbury cannot do other govemment work because it does not have the required security clearances. But Westbary can do the work involving the 3,000 phones. And it can complete this project. in three moaths. "Besides," Westbury"s manager argues, "my labor coss are not zoing to be $95 per phone. We are comminted to maintaining creployment at Westbary at least for the next three months. I can utilize most of my existing people who have slack. I will have to hire back about 20 prodaction workers 1 laid off. For the three months, we are talking aboat $120,000 of additional direct labor," Phonetex is considering another defense coctract with an expected price of 51.1 million and an expected profit of $85,000. The work would have to be completed over the next three months, but Southern does not have the capaciry to do the woek and Westbury does not have the security elearances or capital equipment required by the coatract. Southern's manager says it isn't fair to make him eary Westbary. He points out that Westbury's variable cost, ignoring Hbor, is 33 percect greater than Southem's variable costs. Southern's manager also argues, "Adding another govemment contract will not replace the profit that we will be forgoing. if Westbury does the telcphope manufacturing. See my schedule." Required: Top management has reviewed the Southem manager's data and believes his cost estimates on the new contract to be accurate. Should Phonetex shift the 3,000 phones to Westbury and take the new contract or not? Prepare an analysis supporting your conclusions
