Chapter 7, Problem 7.5BYP

Communication Activity

Hank Jewell is a production manager at a metal fabricating plant Last night, he read an article about a new piece of equipment that would dramatically reduce his division’s costs. Hank was very excited about the prospect, and the first thing he did this morning was to bring the article to his supervisor, Preston Thiese, the plant manager. The following conversation occurred:

Hank: Preston, I thought you would like to see this article on the new PDD1130; they’ve made some fantastic changes that could save us millions of dollars.

Preston: 1 appreciate your interest, Hank, but I actually have been aware of the new machine for two months. The problem is that we just bought a new machine last year. We spent $2 million on that machine, and it was supposed to last us 12 years. If we replace it now, we would have to write its book value off of the books for a huge loss, if I go to top management now and say that I want a new machine, they will fire me. I think we should use our existing machine for a couple of years, and then when it becomes obvious that we have to have a new machine, I will make the proposal.

Instructions

Hank just completed a course in managerial accounting, and he believes that Preston is making a big mistake. Write a memo from Hank to Preston explaining Preston’s decision-making error.