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 cost to manufacture 25,000 units of MTR-2000 in 2018:
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. 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.)