Norton Products, Inc., manufactures potentiometers. (A potentiometer is a device that adjusts electrical resistance.) Currently, all parts necessary for the assembly of products are produced internally. Norton has a single plant located in Wichita, Kansas. The facilities for the manufacture of potentiometers are leased, with five years remaining on the lease. All equipment is owned by the company. Because of increases in demand, production has been expanded significantly over the five years of operation, straining the capacity of the leased facilities. Currently, the company needs more warehousing and office space, as well as more space for the production of plastic moldings. The current output of these moldings, used to make potentiometers, needs to be expanded to accommodate the increased demand for the main product. Leo Tidwell, owner and president of Norton Products, has asked his vice president of marketing, John Tidwell, and his vice president of finance, Linda Thayn, to meet and discuss the problem of limited capacity. This is the second meeting the three have had concerning the problem. In the first meeting, Leo rejected Linda’s proposal to build the company’s own plant. He believed it was too risky to invest the capital necessary to build a plant at this stage of the company’s development. The combination of leasing a larger facility and subleasing the current plant was also considered but was rejected; subleasing would be difficult, if not impossible. At the end of the first meeting, Leo asked John to explore the possibility of leasing another facility comparable to the current one. He also assigned Linda the task of identifying other possible solutions. As the second meeting began, Leo asked John to give a report on the leasing alternative. JOHN: “After some careful research, I’m afraid that the idea of leasing an additional plant is not a very good one. Although we have some space problems, our current level of production doesn’t justify another plant. In fact, I expect it will be at least five years before we need to be concerned about expanding into another facility like the one we have now. My market studies reveal a modest growth in sales over the next five years. All this growth can be absorbed by our current production capacity. The large increases in demand that we experienced the past five years are not likely to be repeated. Leasing another plant would be an overkill solution.” LEO: “Even modest growth will aggravate our current space problems. As you both know, we are already operating three production shifts. But, John, you are right—except for plastic moldings, we could expand production, particularly during the graveyard shift. Linda, I hope that you have been successful in identifying some other possible solutions. Some fairly quick action is needed.” LINDA: “Fortunately, I believe that I have two feasible alternatives. One is to rent an additional building to be used for warehousing. By transferring our warehousing needs to the new building, we will free up internal space for offices and for expanding the production of plastic moldings. I have located a building within two miles of our plant that we could use. It has the capacity to handle our current needs and the modest growth that John mentioned. The second alternative may be even more attractive. We currently produce all the parts that we use to manufacture potentiometers, including shafts and bushings. In the last several months, the market has been flooded with these two parts. Prices have tumbled as a result. It might be better to buy shafts and bushings instead of making them. If we stop internal production of shafts and bushings, this would free up the space we need. Well, Leo, what do you think? Are these alternatives feasible? Or should I continue my search for additional solutions?” LEO: “I like both alternatives. In fact, they are exactly the types of solutions we need to consider. All we have to do now is choose the one best for our company.” Required: 1. Define the problem facing Norton Products. 2. Identify all the alternatives that were considered by Norton Products. Which ones were classified as not feasible? Why? Now identify the feasible alternatives. 3. For the feasible alternatives, what are some potential costs and benefits associated with each alternative? Of the costs that you have identified, which do you think are relevant to the decision?

Basuras Waste Disposal Company has a long-term contract with several large cities to collect garbage and trash from residential customers. To facilitate the collection, Basuras places a large plastic container with each household. Because of wear and tear, growth, and other factors, Basuras places about 200,000 new containers each year (about 20% of the total households). Several years ago, Basuras decided to manufacture its own containers as a cost-saving measure. A strategically located plant involved in this type of manufacturing was acquired. To help ensure cost efficiency, a standard cost system was installed in the plant. The following standards have been established for the products variable inputs: During the first week in January, Basuras had the following actual results: The purchasing agent located a new source of slightly higher-quality plastic, and this material was used during the first week in January. Also, a new manufacturing process was implemented on a trial basis. The new process required a slightly higher level of skilled labor. The higher- quality material has no effect on labor utilization. However, the new manufacturing process was expected to reduce materials usage by 0.25 pound per container. Required: 1. CONCEPTUAL CONNECTION Compute the materials price and usage variances. Assume that the 0.25 pound per container reduction of materials occurred as expected and that the remaining effects are all attributable to the higher-quality material. Would you recommend that the purchasing agent continue to buy this quality, or should the usual quality be purchased? Assume that the quality of the end product is not affected significantly. 2. CONCEPTUAL CONNECTION Compute the labor rate and efficiency variances. Assuming that the labor variances are attributable to the new manufacturing process, should it be continued or discontinued? In answering, consider the new processs materials reduction effect as well. Explain. 3. CONCEPTUAL CONNECTION Refer to Requirement 2. Suppose that the industrial engineer argued that the new process should not be evaluated after only one week. His reasoning was that it would take at least a week for the workers to become efficient with the new approach. Suppose that the production is the same the second week and that the actual labor hours were 9,000 and the labor cost was 99,000. Should the new process be adopted? Assume the variances are attributable to the new process. Assuming production of 6,000 units per week, what would be the projected annual savings? (Include the materials reduction effect.)

Badger Valve and Fitting Company, located in southern Wisconsin, manufactures a variety of industrial valves and pipe fittings that are sold to customers in nearby states. Currently, the company is operating at about 70 percent capacity and is earning a satisfactory return on investment. Management has been approached by Glasgow Industries Ltd. of Scotland with an offer to buy 130,000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost identical to Badger's pressure valve; however, a fire in Glasgow Industries' valve plant has shut down its manufacturing operations. Glasgow needs the 130,000 valves over the next four months to meet commitments to its regular customers. Glasgow is prepared to pay $30.40 each for the valves. Badger's total product cost, based on current attainable standards, for the pressure valve is $32.00, calculated as follows: Direct material Direct labor Manufacturing overhead Total product cost Manufacturing overhead is applied to…

A new installation technique has been developed that will enable Washington’s engineers to install 7 additional units of equipment a year. The new method will increase installation costs by $145,000 each year. Should Washington implement the new technique? Show your calculations.

The Baccus Corp. manufactures medical equipment. This is a capital intensive industry and investments in fixed assets exceed $5 million a year. The minimum cost for production equipment is $75,000. When supervisors want new production machinery, they contact the plant manager. The plant manager approves or denies the request based on discussions with the production supervisor, the repair and maintenance supervisor, and the quality control supervisor. The repair department performs routine maintenance on all of the production equipment. Occasionally the repair department rebuilds a machine to extend its useful life. All of the costs associated with the repair department are charged to manufacturing overhead. When a machine becomes obsolete, production employees move it to a corner of the factory floor and break it down so that parts can be used in other machines. Production employees routinely remove parts for personal use. Some smaller machines have disappeared completely from the…

Two years ago, Toshiba Electronics made a $15 million investment in newassembly line machinery. It purchased approximately 200 units at $70,000 each and placed them in plants in 10 different countries. The equipment sorts, tests, and performs insertion-order kitting on electronic components in preparation for special-purpose printed circuit boards. A new international industry standard requires a $16,000 additional cost next year (year 1 of retention) on each unit in addition to the expected operating cost. Due to the new standards, coupled with rapidly changing technology, a new system is challenging these 2-year-old machines. The chief engineer at Toshiba USA has asked that a replacement study be performed this year and each year in the future, if need be. At i = 10% and with the estimates below, do the following:a. Determine the AW values and economic service lives necessary to perform the replacement study. Challenger: First cost: $50,000 Future market values: decreasing by 20% per…

The Pittsburgh division of Vermont Machinery, Inc., manufactures drill bits.One of the production processes for a drill bit requires tipping, whereby carbide tips are inserted into the bit to make it stronger and more durable. This tipping process usually requires four or five operators, depending on the weekly workload. The same operators are also assigned to the stamping operation, where the size of the drill bit and the company's logo is imprinted on the bit. Vermont is considering acquiring three automatic tipping machines to replace the manual tipping and stamping operations. If the tipping process is automated, the division's engineers will have to redesign the shapes of the carbide tips to be used in the machine. The new design requires less carbide, resulting in savings on materials. The following financial data have been compiled: Project life: six years. Expected annual savings: reduced labor, $56,000; reduced material, $75,000; other benefits (reduced carpal tunnel syndrome…

A regional office of Zoom Inc. is expanding and is currently in the process of relocating to a new building. It is looking for 7,000 square feet of usable office space for its 25 employees. A leasing broker shows Zoom Inc. space in a 20-story multi-tenanted office building. This building contains 800,000 square feet of gross building area. A total of 10,000 square feet is interior space and is non-rentable. The non-rentable space includes areas in the basement, elevator core, and other mechanical and structural components. There are 60,000 square feet of common area is the lobby area that can be used by all tenants and, of course, their business clients. The square footage that is exactly what Zoom Inc. is looking for is on the lucky thirteenth floor. The thirteenth floor contains 35,000 square feet of rentable area. There are other tenants on that floor already, and they occupy a combined total of 24,000 square feet of usable space. The leasing broker indicated to Zoom Inc. that base…

TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,160 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding machine time, annual production is limited to 5,400 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums: WVD Drums Selling price per drum $ 181.00 Cost per drum: Direct materials $52.10 Direct labor ($26 per hour) 5.20 Manufacturing overhead 9.30 Selling and administrative expense 31.40 98.00 Margin per drum $ 83.00 Management…

TufStuff, Incorporated, sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company's products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,360 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding machine time, annual production is limited to 5,900 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums: WVD Drums Selling price per drum Cost per drum: Direct materials Direct labor ($36 per hour) Manufacturing overhead Selling and administrative expense Margin per drum Selling price per frame Cost per frame: Direct materials Direct labor ($18 per hour) $ 52.10 7.20 15.30 33.40…

Heffron Technologies (HT) is considering the introduction of a new product. The code name of the new product is COSA. This new product will require the installation of new plant, which is estimated to cost $500,000. The company is to install the new plant in a factory site that the company acquired one year ago for $600,000, prices have increased dramatically in the area, increasing by 20% over the year. The factory was acquired before the new product was considered and was thought to be a good buy. The factory has been empty for the past year. In addition to the cost of plant, HT will require $300,000 in net working capital to start. The additional net working capital will be recovered in full at the end of the project’s life. HT estimates that sales revenue for the new product will be $700,000 a year for the five-year life of the product. The cash operating costs are expected to be $360,000 a year and include cost of goods sold. HT will use the straight-line method to…

TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,000 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding machine time, annual production is limited to 5,000 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums: WVD Drums Selling price per drum $ 149.00 Cost per drum: Direct materials $52.10 Direct labor ($18 per hour) 3.60 Manufacturing overhead 4.50 Selling and administrative expense 29.80 90.00 Margin per drum $ 59.00 Management…

TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal drum, called the WVD drum, used to store toxic wastes. Production is constrained by the capacity of an automated welding machine that is used to make precision welds. A total of 2,000 hours of welding time is available annually on the machine. Because each drum requires 0.4 hours of welding machine time, annual production is limited to 5,000 drums. At present, the welding machine is used exclusively to make the WVD drums. The accounting department has provided the following financial data concerning the WVD drums: WVD Drums Selling price per drum $ 149.00 Cost per drum: Direct materials (Variable) $52.10 Direct labor (Variable) 3.60 VariableManufacturing overhead…

Solution Summary: The author explains tactical decision making as a process in which the company can choose the correct alternative based on the profitability.

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