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.)

Chilton Peripherals manufactures printers, scanners, and other computer peripheral equipment. In the past, thecompany purchased equipment used in manufacturing from an outside vendor. In March 2018, Chilton decidedto design and build equipment to replace some obsolete equipment. A section of the manufacturing plant was setaside to develop and produce the equipment. Additional personnel were hired for the project. The equipment wascompleted and ready for use in September.Required:1. In general, what costs should be capitalized for a self-constructed asset?2. Discuss two alternatives for the inclusion of overhead costs in the cost of the equipment constructed by Chilton. Which alternative is generally accepted for financial reporting purposes?3. Under what circumstance(s) would interest be included in the cost of the equipment?

To automate one of its production processes, Milwaukee Corporation bought three flexible manufacturing cells at a price of $400,000 each. When they were delivered, Milwaukee paid freight charges of $30,000 and handling fees of $15,000. Site preparation for these cells cost $50,000. Six employees, each earning $15 an hour, worked five 40-hour weeks to set up and test the manufacturing cells. Special wiring and other materials applicable to the new manufacturing cells cost $2,000. Determine the cost basis (the amount to be capitalized) for these cells.

Rodeo Jeans are stonewashed under a contract with independent USA Denim Company. USA Denim purchased two semiautomatic machinesthat cost $19,000 each at (t = 0). Annual operating and maintenance costs are $15,000 per machine. Two years after purchasing the machines, USA Denim made them fully automatic at a cost of $12,000 per machine. In the fully automatic mode, the operating and maintenance costs are $6,000 the first year, increasing by $1,000 each year thereafter. The contract with Rodeo Company is for 8 years. Draw the cash flow diagram for all of USA Denim’s investment and other costs assuming the contract will not be extended beyond 8 years.

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…

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…

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…

Kinnear Plastics manufactures various components for the aircraft and marine industry. Kinnear buys plastic from two vendors: Tappan Corporation and Hill Enterprises. Kinnear chooses the vendor based on price. Once the plastic is received, it is inspected to ensure that it is suitable for production. Plastic that is deemed unsuitable is disposed of. The controller at Kinnear collected the following information on purchases for the past year: Tappan Hill Total purchases (tons) 6,000 10,000 Plastic discarded 120 600 The purchasing manager has just received bids on an order for 290 tons of plastic from both Tappan and Hill. Tappan bid $1,813 and Hill bid $1,786 per ton. Required: Assume that the average quality, measured by the amounts discarded…

Otero Fibers, Inc., specializes in the manufacture of synthetic fibers that the company uses in many products such as blankets, coats, and uniforms for police and firefighters. Otero has been in business since 1985 and has been profitable every year since 1993. The company uses a standard cost system and applies overhead on the basis of direct labor hours. Otero has recently received a request to bid on the manufacture of 800,000 blankets scheduled for delivery to several military bases. The bid must be stated at full cost per unit plus a return on full cost of no more than 10 percent after income taxes. Full cost has been defined as including all variable costs of manufacturing the product, a reasonable amount of fixed overhead, and reasonable incremental administrative costs associated with the manufacture and sale of the product. The contractor has indicated that bids in excess of $30 per blanket are not likely to be considered. In order to prepare the bid for the 800,000 blankets,…

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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