Advanced Cost and Managerial Accounting

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CASE STUDY: MANAGERIAL ACCOUNTING 1

Case Study: MFA 700 Advanced Cost and Managerial Accounting

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Case Study: MFA 700 Advanced Cost and Managerial Accounting.

Strategic Decision Making is the process of development of options and putting into action choices that influence the welfare of the organization in the long term. Organizational changes are a prominent feature of such decision making and involve large source commitments upon implementation.

In this case study Maxitech is faced with a situation where strategic decision making is pivotal to the organization’s survival in a market with competitors. It is an organization that is responsible for producing electronic products with a varied portfolio, not limited to manufacturing to just one unique product but many.Moreover,such companies that pertain to the electronic goods industry are subject to quality control checks and the company that excels in conforming to such standards will revel in accessing the maximum market share. The organization is also prone to the threat of constant technological advancement rendering all products that do not evolve with the same speed as obsolete. The products being made are also not packaged in a uniform manner with some being made into sets and other being sold individually causing a burden on the production and packaging departments. The Engineering Department is responsible for the development of production plans, with no mention of a Research and Development department to conduct Product Life costing that would ascertain the viability of products and govern the forecast of the production units that should be manufactured to breakeven or make a profit. Two products have already been discontinued due to this practice.

Maxitech is now faced with the decision of whether to produce multi alarm clocks in house or outsource the service from one of two companies to complete a large order.Maxitech having faced great difficulty in the production of the circuit boards is aware that for a large order of 5000 units it cannot bear the risk of giving a faulty product. The in house production process is not streamlined, the product is unprofitable due to high costs, warranty claims and product recalls. This is obviously a major setback for an organization, tarnishing the goodwill of the company that does not observe quality assurance at its end and produces products that are faulty and not up to standard, thus giving competitors the edge to gain a major chunk of the market share. Moreover some of the earlier produced units were hazardous, causing electric shock to customers which is an alarming situation for a company as it is exposing the public to safety issues. Such a situation can make the Company vulnerable to litigation and the imposition of fines by Safety Regulation Companies. This negative publicity will also cause the Company bad reputation and a loss in sales. Since the revision of manufacturing will take 6 months the Company in the present situation has no other option but to outsource the service for the immediate large order that is conditional on the production of the inclusion of the clocks.

The option of choosing an outsourced vendor does come with its disadvantages. Maxitech would lose control over the production process having no oversight of the production of the units. The issue of labor turnover also needs to be considered since no labor would be required to manufacture the products and this can cause unrest in employees. Logistics of the other options is important since the delivery method and timely transportation is paramount to the order completion and Maxitech would obviously not have any control over this factor once it outsources tithe outsourcing would require no function from two machines causing a fixed charge of $5000 dollars for their depreciation which is a sunk cost that the company will have to bear.. Quality control checks will also no longer be in the control of Maxitech on agreement of buying the products from the vendor.

If Maxitech would have continued production of the product in-house (Make Decision) it would have obtained the following Profit/Loss situation.

Note: The Fixed Overhead charge of $5000 for machine depreciation is a sunk cost therefore not relevant to Maxitech Buy or Make decision. The comparison therefore will be amongst the variable costs of the three options:

Category

In-house Production

Outsource Production

Maxitech

TransTech Asia

Omega Products

Cost per Unit($)

6.90

7.50

5.00

Units Required

5,000

5,000

5,000

Total Variable Cost ($)

34,500.00

37,500.00

25,000.00

Selling Price ($)

72,500.00

72,500.00

72,500.00

Total Profit/(Loss) ($)

38,000.00

35,000.00

47,500.00

As visible from the table above from the financial perspective it would have been most favorable to outsource the watches from Omega since it results in the most profitable result, however this decision would result in non-financial implications. Omega is a new entrant in the market therefore its going concern status is prone to debate. The company has experienced significant labor turnover and Maxitech would be at risk if the labor force falls short due to this during the production of its order. Being a new company there is also a possibility that the rules and regulations in place are not streamlined and logistics operation would be a major concern. Moreover the Local press reports about the owners may face tax evasion charges in the future is a huge negative factor to be taken into consideration. Maxitech cannot afford to do business with a company that does not follow ethical guidelines while conducting business. If it had agreed to outsource the products from Omega it would have exposed itself to bad publicity and litigation charges and this would affect the goodwill of Maxitech in the market. Despite the quality being promised by Omega at the lowest cost, the aforementioned factors are enough to deem their proposal not acceptable.

TransTech had initially offered an asking price of $10 per unit if only 5000 units were required. Maxitech has therefore decided to procure at least 6000 units from TransTech Asia (1000 units for at least 6 months) at a price of $7.50 per unit. This has not only brought the price down by $2.50 per unit but also freed Maxitech’s resources for the next 6 months to focus solely on developing the circuit board in house. This option however needs to consider that Maxitech would procure an additional 1000 units from TransTech Asia which might be less/more than the sales forecast for the next 6 months. There is a risk of obsolete inventory and Maxitech needs to ensure that it has available warehouse for storage of the units and a proper inventory system that regulates the movement of the products and in the case of a shortage of inventory TransTech Asia will be able to replenish the order quantity on time in emergency. The strategy of procuring these watches at $7.50 is most appropriate as it will not bind Maxitech into a long term commitment with TransTech over a year. Once Maxitech is able to master the circuit boards production in-house it can revert back to maintaining control over its products and make them. The current order will be easily completed using this strategy and Maxitech can always order more units from TransTech Asia in case of need without running the risk of procuring 15000 units in a year at a lower cost without knowing whether the same can be sold in that time.

Considering all the factors at play here, Maxitech does not currently have the resources to complete the order till the 6 months leading to the revision of in-house manufacturing and runs the risk of losing the order if the watches are not part of it.Amongst the other choices whereby Omega products being more profitable financially but with dire negative publicity, unethical practices and labor turnover and TransTech Asia which is more expensive compared to in-house production and Omega but more reliable, promising great quality and a need of the hour providing flexibility in cost if more units are required. In Comparison to signing an agreement for a yearlong contract with Transtech Asia, Maxitech has made the right decision in opting for the six month option because it is the same time required for the in-house manufacturing revision to take place and Maxitech has the flexibility of resuming production after reviewing the progress of its production process in 6 months.

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