Comp tech, Inc. manufactures printers for use with home computing systems. The firm currently manufactures both the electronic components for it's printers and the plastic cases in which the devices are enclosed. Jim Cassanitti, the production manager, recently received a proposal from Universal Plastics Corporation to manufacture the cases for Comp Tech's printers. If the cases are purchased outside, Comp Tech will be able to close down it's Printer Case Department. To help decide whether to accept the bid from universal Plastics Corporation, Cassanitti asked Comp Tech's controller to prepare an analysis of the costs that would be saved if the Printer Case Department were closed. Included in the controller's list of annual cost savings were the following items:
Building rental (The printer Case Department occupies one-sixth of the factory building, which comp tech rents for $177,000 per Year).......$29,500
Salary of the Printer Case Department Supervisor-$50,000.
In a lunchtime conversation with the controller, Cassantti learned that CompTech was currentlyrenting space in a warehouse for $39,000. The space is used to store completed printers. If the Printer Case Department were discontinued, the entire storage operation could be moved into the factory building and occupy the space vacated by the closed department. Cassanitti also learned that the supervisor would be assigned the job of managing the assembly department , whose supervisor recently gave notice of his retirement. All of CompTech's department supervisors earn the same salary.
1. You have been hired as a consultant by Cassanitti to advise him in his decision. Write a memo to Cassanitti commenting on the costs of space and the supervisory salaries included in the controller's cost analysis. Explain in your memo about the "real" costs of the space occupied by the Printer Case Department and the supervisors salary. What types of cost are these?
2. Independent of your response to requirement (1), suppose that CompTech's controller had been approached by his friend JackWestford, the assistant supervisor of The Printer Case Department. Westford is worried that he will be laid off if the Printer Case Department is closed down. He has asked his friend to understate the cost savings from closing the department, in order to slant the production manager's decision toward keeping the department in operation. Comment on the controller;s ethical responsibilities.
Hilton, R.W., and Platt, D.E. (2017). (authors)
Managerial Accounting: Creating Value in a Dynamic Business Environment. 11th Edition .
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