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11-36 Make or Buy (45-60 min)
1. Since the per-unit contribution margin for manufactured fans ($24) is
higher than for purchased fans ($12), the company should manufacture as
many fans as possible (15,000), and purchase the remainder (5,000) from
Harris Products.
2. The total contribution margin for the marine pumps = $21 per unit ×
25,000 units = $525,000
Since the total contribution margin from making pumps ($525,000) is
11-36 (Continued-1)
3. Some of the possible strategic factors to consider are:
Re: The pumps:
Will the sale of pumps introduce Martens to new markets and new
customers that might benefit other product lines?
Can Martens compete in the marine pump market? How
competitive is this market, and what are the critical success factors
that are likely to lead to success for Martens?
How reliable are the estimates used to develop the predictions for
revenues and costs for the pumps? How reliable is the market
research that predicted growth in pump sales?
Will the sale of pumps affect Martens’ image in either a positive or
negative fashion? For example, will Martens’ current customers
view Martens as a high quality/innovative manufacturer of pumps?
How long is the expected growth in pump sales expected to
continue?
11-36 (Continued-2)
Re: The purchase of attic fans from Harris Products:
What are the alternative uses of Martens’ production capacity, in
addition to pumps and attic fans that might produce higher
contribution?
How reliable is Martens’ information that Harris is a reliable producer
of quality products?
How will Martens’ customers react, if at all, to know that the attic fans
are not manufactured by Martens?
11-37 Make or Buy; Strategy; Ethics (45-50 min)
1. An analysis of per unit and total costs for 30,000 units shows that the
Midwest Division should purchase the parts for a savings of $48,975
produced in 2015. Unit variable costs are based on 2015 costs and
units; fixed costs in total are expected to be the same in 2016 as they
were in 2015.
2. Strategic factors that the Midwest Division and Paibec Corporation
should consider before agreeing to purchase MTR-2000 from Marley
Company include the following:
The quality of the Marley component should be equal to, or better
than, the quality of the internally made component, or else the
11-37 (continued-1)
3. Referring to the specific standards for ethical practice by a
management accountant (http://www.imanet.org/PDFs/Statement
%20of%20Ethics_web.pdf ) , Lynn Hardt should consider the ethical
standards of competence, integrity, and objectivity:
Competence
Prepare complete and clear reports and recommendations after
appropriate analysis of relevant and reliable information. John has
asked Lynn to adjust and falsify her report and leave out some
manufacturing overhead costs.
Integrity
Refrain from either actively or passively subverting the attainment
of the organization's legitimate and ethical objectives, Paibec has
a legitimate objective of trying to obtain the component at the
Credibility
Communicate information fairly and objectively. Hardt needs to
perform an objective make-or-buy analysis and communicate the
results objectively.
11-37 (continued-2)
Disclose all relevant information that could reasonably be
expected to influence an intended user’s understanding of the
reports, comments, and recommendations presented. Hardt needs
to fully disclose the analysis and the expected cost increases.
11-38 Outsourcing Call Centers (40-45 min)
1. The corporate overhead cost is irrelevant since in total it will not
change whether or not the call center is returned to Atlanta (i.e., it is
not an avoidable cost).
0.747 for Year 4 and Year 5, respectively). The present value tables are
located at the end of Chapter 12. (NOTE: the results reported above are
based on exact present-value factors; if the factors from the text, which are
rounded, are used, the answer will be slightly different from that presented
above.)
The analysis shows that the Naftel contract would save MB $50,000 per
When analyzed on a present value basis (@ a 6% discount rate), the
comparison is a total for all five years for the Naftel contract of $17,690,000
Whether you consider the undiscounted or the present-value analysis, it is
clear that the Naftel contract has the lower cost. But, the difference is not
great relative to total cost, so that strategic issues are important in making
the final decision. Some of these strategic issues are discussed in parts 2
and 3 below. In addition:
11-38 (continued)
Since customer service is very important for MB’s success,
would the location of the call center in Atlanta or at Naftel provide
the better quality of customer service? This is the dominant
strategic question, especially since the cost difference is not
significant relative to total cost.
Since the banking business was (at the time of the decision)
forecast to be in troubled times for the next several months,
would it not be important to retain the admittedly small cost
advantage of the Naftel contract?
Given the difficult times predicted (at the time) for the banking
industry, would it not have been especially important to
differentiate the company from others? Customer service is one
important way to do that. If customer service in Atlanta could be
carefully managed so that it provides very high quality service,
this could be an important competitive advantage.
2. At the time of the decision (late 2008), the value of the dollar had
been increasing relative to most other currencies. This means that
the cost to MB of the service by Naftel would decrease in currency-
adjusted terms if the contract is in India’s currency, the Rupee. Other
3. The ethical issues in the decision here include the consideration of a
11-39 Project Analysis: Sales Promotions (60 min)
1. The relevant cost analysis follows:
The Glider contest has a $13,600 positive contribution margin net of
the estimated cost of the prize. On the other hand, the Chair-and-
Stool Set contest has a negative contribution of $2,463. Note that the
above solution uses actual rather than budgeted price and cost
information.
The analysis below compares the contribution margin for each
product based on actual sales volume at actual cost, actual
selling price, and actual resource usage to the product contribution
margins based on actual sales volume at budgeted cost,
budgeted selling price, and budgeted resource usage. The
Thus, strategically, it is important for Hillside to focus on cost
management as well as improving sales.
11-39 (continued-1)
2. Some strategic factors that should be considered:
The contest appears to reward an increase of sales in units.
However, the average sales price for each product has already
fallen below budgeted levels. If the contest provides an
