The Case Study in Unit I (Case Study 2-2: Mowerson Division) is located on pages 83-85 in your textbook. Read the caseand utilize the data included in the case to answer the following questions.

1. Discuss whether Jim Wright should have analyzed only the costs and savings that Mowerson would realize in2002.

2. For each of the 10 items listed in Wright?s financial analysis, indicate whether:

a. The item is appropriate or inappropriate for inclusion in the report. If the item is inappropriate, explain why itshould not be included in the report.

b. The amount is correct or incorrect. If the amount is incorrect, state what the correct amount is.

3. What additional information about Tri-Star would be helpful to Mowerson in evaluating its manufacturing decision?

Case 2-2: Solution to Mowerson Division (CMA adapted) (60 minutes) [Opportunity cost of make/buy decisions] In this problem, specific identification of opportunity costs is required. a. Joseph Wright should have analyzed the costs and savings that Mowerson would realize for a period greater than one year (2007). For instance, Wright should have considered the fact that Mowerson expects production volume to steadily increase over the next three years. Under these circumstances, the difference between Mowerson's standard cost for manufacturing PCBs and Tri-Star's price for PCBs becomes increasingly important. A decision of this type is dependent on events in the future, i.e., differing income streams, production plans, and production capabilities. Furthermore, this is a long-term decision, which means that more than one year should be considered. Once Mowerson dismisses the assembly technicians, it would not be able to rehire them immediately. By incorporating more than 2007 costs and revenues, Mowerson should also use discounted cash flow techniques to recognize the time value of money. b. (i) Appropriate/Inappropriate (ii) Correct/Incorrect 1. Appropriate. Mowerson will no longer have to pay these wages. 1. Correct. This is the cost associated with the 40 technicians who will no longer work at Mowerson. 2. Inappropriate. The Assembly Supervisor will continue to be employed by Mowerson for two years. 2. Incorrect. Cost will continue to be incurred by Mowerson and only the amount should be included in Wright's analysis, that is salary less the benefits provided by the supervisor. 3. Appropriate but only to the extent of the outside rental space. The cost associated with the main plant floor space is inappropriate because Mowerson is still using this space. 3. Incorrect. Only the amount related to the outside rental space (1,000 $9.50 = $9,500) should be included. The cost associated with the floor space in the main plant will continue. 4. Inappropriate. Although the purchasing clerk is on temporary assignment to a special project, the clerk's employment at Mowerson will continue. 4. Incorrect. There will be no savings associated with the purchasing clerk, except for any value added by the clerk to the special project. 5. Appropriate. Mowerson will realize this savings from the reduction in purchase orders issued. 5. Correct based on the information provided. 6. Inappropriate. Mowerson has included the cost of incoming freight in direct material cost and Tri-Star has included the cost of delivery in its price. Therefore, any differential in freight expense is accounted for in Item 7. 6. Incorrect. Any savings or additional costs associated with freight expense will be included in Item 7. 7. Appropriate. Any differential between the inhouse cost to manufacture and the purchase cost should be accounted for in Wright's analysis. 7. Incorrect. The correct amount should be $2,975,000 [($60.00-30.25) 100,000]. The only relevant manufacturing costs are direct material ($24.00) and variable overhead ($6.25) as fixed overhead will continue to be incurred irrespective of the decision and direct labor costs have already been considered as a savings in Item 1. 8. Appropriate. The junior engineer represents an addition to the staff. 8. Correct based on the information provided. 9. Appropriate. The quality control inspector represents an addition to the staff. 9. Correct based on the information provided. 10. Appropriate. The increase in the safety stock represents additional cost to Mowerson. 10. Incorrect. Mowerson currently maintains a safety stock of 1,800 boards so a more correct amount is $4,800 as calculated below. However, the correct safety stock level really cannot be determined without knowing the consequences of a stockout, i.e., the cost of a stockout must be compared to the additional storage cost. Safety Percentage of Time Stock of Expected Tri-Star Deliveries Probability PCBs Value Will be Late (1) (2) (1) (2) 4% .30 2,500 750 6% .40 4,000 1,600 8% .25 6,000 1,500 10% .05 7,000 350 New safety stock level 4,200 Current level 1,800 Increase in safety stock 2,400 Cost per unit $2 Additional cost $4,800 c. In evaluating its manufacturing decision, Mowerson should consider information about Tri-Star's: financial stability credit rating reputation for product quality and ability to meet quoted deliveries potential price increases in the future capacity levels competition, i.e., other potential sources of supply besides Tri-Star