Question

You are the product line manager for a snow board manufacturing company based in Provo, Utah. As product line manager for the company’s Xtreme line, you are ultimately responsible for all aspects of production as well as the profitability of the line. You have direct authority over the production, marketing and sales of the company’s Xtreme line of snowboards. The first quarter sales figures are in and you see that sales are down and in several key markets you no longer hold the #1 position. You are concerned that when you attend the quarterly management meeting that this poor performance is going to be a topic of much discussion. Several months ago, you received information from an overseas manufacturer that can manufacture the bindings for the snow board at a fraction of your current cost to produce them in-house. This will lower the cost to produce the Xtreme line allowing the company to increase their margin, lower prices to customers or some combination of both. Consequently, you believe it is now time to revisit that correspondence and start putting together a plan to address the lackluster Q1 earnings report. Questions 1. What qualitative and quantitative factors will you have to consider before recommending that the company outsource the production of the binding component of the Xtreme snow boards? 2. What accounting information will you need in order to make the best decision for the company? When identifying the accounting information needed, indicate the following: a. Is the information you need financial or managerial in nature? b. How will you use the accounting information in evaluating the decision? 3. Identify any potential risks associated with making this decision and how those risks can be addressed.

Answer 1

Answer 1= The different qualitative factors to be considered are as below=

The type of technology used in the production and the available resources and their quality

Whether the production and supply deadlines can be met by the company

What kind of quality inspection has to be performed

The mode of communication used

The reliability of the outsourced organization

The various quantitative factors are as below=

Cost of carrying the inventor

The cost-saving resulted from the outsourcing

Different operational and administrative cost

Answer 2= The different variable costs and fixed costs of production, production capabilities, capacity utilization prior and post of the outsourcing decision can be seen as the important accounting information that can be analysed.

A=The financial cost will be related to the variable cost and fixed cost related to production. On the other hand, the managerial cost will include the analysis of production capability and capacity utilization.

B= The different costs that can be prevented by the outsourcing decision will be determined with the help of fixed cost and variable cost of production. On the other hand, the possible utilization of different resources can be estimated with the help of analyzing the production capabilities and capacity utilization.

Answer 3= The different risks related to the outsourcing are given as below=

Loss of control over the quality of the product

Possible conflict with the outsourced organization

There may be various hidden costs associated with the outsourced production

There is always a chance of theft of intellectual property

In order to overcome these issues, it is important that the management conducts a through negotiation on the various direct and indirect costs associated with the production. In order to avoid the clashes, there must be a formation of a coordination team that will deal with the clash of interests. In order to avoid the IP theft contracts can be made preventing any unauthorized access to the data and content of the vital information of the company.