Make vs. Buy; Strategy; Ethics The Midwest Division of the Paibec Corporation manufactures subassemblies used in Paibec’s final products. Lynn Hardt of Midwest’s profit planningdepartment has been assigned the task of determining whether Midwest should continue to manufacture a subassembly component, MTR-2000, or purchase it from Marley Company, an outsidesupplier. Marley has submitted a bid to manufacture and supply the 30,000 units of MTR-2000that Paibec will need for 2019 at a per-unit price of $20.00. Marley has assured Paibec that theunits will be delivered according to Paibec’s production specifications and needs. The contractprice of $20.00 is applicable only in 2019, but Marley is interested in entering into a long-termarrangement beyond 2019.Lynn has submitted the following information regarding Midwest’s cost to manufacture 25,000units of MTR-2000 in 2018:[LO 11-3]Direct materials $168,750Direct labor 100,000Factory space rental 150,000Equipment leasing costs 45,000Other manufacturing costs 250,000Total manufacturing costs $713,750Lynn has collected the following information related to manufacturing MTR-2000:• Equipment leasing costs represent special equipment used to manufacture MTR-2000. Midwestcan terminate this lease by paying the equivalent of 1 month’s lease payment for each of the2 years left on its lease agreement.• Forty percent of the other manufacturing overhead is considered variable. Variable overheadchanges with the number of units produced, and this rate per unit is not expected to change in2019. The fixed manufacturing overhead costs are not expected to change (in total) whetherMidwest manufactures or purchases MTR-2000. Midwest can use equipment other than the leasedequipment in its other manufacturing operations.• Direct materials cost used in the production of MTR-2000 is expected to increase 7% in 2019.• Midwest’s direct labor contract calls for a 4% wage increase in 2019.• The facilities used to manufacture MTR-2000 are rented under a month-to-month rentalagreement. Midwest would have no need for this space if it does not manufacture MTR-2000.Thus, Midwest can withdraw from the rental agreement without any penalty.Final PDF to printerblo17029_ch11_411-459.indd 450 02/19/18 09:08 AM450 Part Two Planning and Decision MakingJohn Porter, Midwest’s divisional manager, stopped by Lynn’s office to voice his opinionregarding the outsourcing of MTR-2000. He commented, “I am really concerned about outsourcing MTR-2000. I have a son-in-law and a nephew, not to mention a member of our bowling team,who work on MTR-2000. They could lose their jobs if we buy that component from Marley.I really would appreciate anything you can do to make sure the cost analysis shows that we shouldcontinue making MTR-2000. Corporate is not aware of materials cost increases and maybe you canleave out some of those fixed costs. I just think we should continue making MTR-2000.”Required1. Prepare a relevant cost analysis that shows whether the Midwest Division should make MTR-2000 orpurchase it from Marley Company for 2019. Specifically, (a) what is the relevant cost per unit to makeand the relevant cost per unit to buy externally? (Round both answers to 2 decimal places.) (b) What isthe total difference in relevant costs between the two alternatives, assuming a volume of 30,000 units?(Round answer to nearest whole number.)2. Identify and briefly discuss the strategic factors that Midwest should consider in this decision.3. By referring to the specific ethical standards for management accountants outlined in Chapter 1,assess the ethical issues in John Porter’s request of Lynn Hardt. (See https://www.imanet.org/career-resources/ethics-center.)
Make vs. Buy; Strategy; Ethics The Midwest Division of the Paibec Corporation manufactures subassemblies used in Paibec’s final products. Lynn Hardt of Midwest’s profit planning
department has been assigned the task of determining whether Midwest should continue to manufacture a subassembly component, MTR-2000, or purchase it from Marley Company, an outside
supplier. Marley has submitted a bid to manufacture and supply the 30,000 units of MTR-2000
that Paibec will need for 2019 at a per-unit price of $20.00. Marley has assured Paibec that the
units will be delivered according to Paibec’s production specifications and needs. The contract
price of $20.00 is applicable only in 2019, but Marley is interested in entering into a long-term
arrangement beyond 2019.
Lynn has submitted the following information regarding Midwest’s
units of MTR-2000 in 2018:
[LO 11-3]
Direct materials $168,750
Direct labor 100,000
Factory space rental 150,000
Equipment leasing costs 45,000
Other manufacturing costs 250,000
Total manufacturing costs $713,750
Lynn has collected the following information related to manufacturing MTR-2000:
• Equipment leasing costs represent special equipment used to manufacture MTR-2000. Midwest
can terminate this lease by paying the equivalent of 1 month’s lease payment for each of the
2 years left on its lease agreement.
• Forty percent of the other manufacturing overhead is considered variable. Variable overhead
changes with the number of units produced, and this rate per unit is not expected to change in
2019. The fixed manufacturing overhead costs are not expected to change (in total) whether
Midwest manufactures or purchases MTR-2000. Midwest can use equipment other than the leased
equipment in its other manufacturing operations.
• Direct materials cost used in the production of MTR-2000 is expected to increase 7% in 2019.
• Midwest’s direct labor contract calls for a 4% wage increase in 2019.
• The facilities used to manufacture MTR-2000 are rented under a month-to-month rental
agreement. Midwest would have no need for this space if it does not manufacture MTR-2000.
Thus, Midwest can withdraw from the rental agreement without any penalty.
Final PDF to printer
blo17029_ch11_411-459.indd 450 02/19/18 09:08 AM
450 Part Two Planning and Decision Making
John Porter, Midwest’s divisional manager, stopped by Lynn’s office to voice his opinion
regarding the outsourcing of MTR-2000. He commented, “I am really concerned about outsourcing MTR-2000. I have a son-in-law and a nephew, not to mention a member of our bowling team,
who work on MTR-2000. They could lose their jobs if we buy that component from Marley.
I really would appreciate anything you can do to make sure the cost analysis shows that we should
continue making MTR-2000. Corporate is not aware of materials cost increases and maybe you can
leave out some of those fixed costs. I just think we should continue making MTR-2000.”
Required
1. Prepare a relevant cost analysis that shows whether the Midwest Division should make MTR-2000 or
purchase it from Marley Company for 2019. Specifically, (a) what is the relevant cost per unit to make
and the relevant cost per unit to buy externally? (Round both answers to 2 decimal places.) (b) What is
the total difference in relevant costs between the two alternatives, assuming a volume of 30,000 units?
(Round answer to nearest whole number.)
2. Identify and briefly discuss the strategic factors that Midwest should consider in this decision.
3. By referring to the specific ethical standards for management accountants outlined in Chapter 1,
assess the ethical issues in John Porter’s request of Lynn Hardt. (See https://www.imanet.org/
career-resources/ethics-center.)
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