Pensacola Printer Company manufactures printers for use with home computing systems. The firm currently manufactures both the electronic components for printers and the plastic cases in which the devices are enclosed. Jim Cassanitti, the production manager, recently received a proposal from the Universal Plastics Corporation to manufacture the cases for Pensacola's printers. If the cases are purchased outside, Pensacola Printer Company will be able to close down its Printer Case Department. To help decide whether to accept the bid from Universal Plastics Corporation, Cassanitti asked Pensacola'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 Pensacola rents for $180,600 per year).....................................$30,100
Salary of the Printer Case Department supervisor................................$48,000
In a lunchtime conversation with the controller, Cassanitti learned the Pensacola printer company was currently renting space in a warehouse for $41,000. The space is used to store completed printers. If the Printer Case Department were discontinued, the entire operation could be moved into the factory building and occupy the space vacated by the closed department. Cassanitti also learned that the supervisor of the Printer Case Department would be retained by Pensacola even if the department were closed. The supervisor would be assigned the job of managing the assembly department, whose supervisor recently gave notice of his retirement. All of Pensacola Printer Company's department supervisors earn the same salary.
1. You have been hired as a consultant by Cassinitti to advise him in his decision. Write a memo to Cassinitti commenting on the costs of space and 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 supervisor's salary. What types of costs are these?
2. Independent of your response to requirement (1), suppose that Pensacola Printer Company's controller had been approached by his friend Jack Westford, 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.
Westford 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 responsibility.
MEMO TO CASSINITTI----
The printer case department is carried on in the factory building and it occupies about one-sixth of the factory building. And because of this, the Pensacola Company has to hire a warehouse for storing completed printers. This costs the company an additional $41,000. Hence by closing the printing case department the company will save $41000. This is the additional cost which the company has to bear because of occupation of factory building by the case department. The rent of the factory building is a fixed commitment which the company has to bear, whether the case department is running or not. So in ay case, that cost is sunk and fixed. Hence the actual savings of the company is $41000. So if the company closes the printer case department, and stores ...
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