Question

Merrimack Corporation makes a special purpose machine, D4H, used in the textile industry. Merrimack has designed the D4H machine for 2017 to be distinct from its competitors. It has been generally regarded as a superior machine. Merrimack presents the following data for 2016 and 2017.

		2016	2017
1	Units of D4H produced and sold	200	225
2	Selling price	$45,000	$48,000
3	Direct materials (kilograms)	315,000	322,500
4	Direct material cost per kilogram	$8.50	$9.25
5	Manufacturing capacity in units of D4H	290	290
6	Total conversion costs	$2,175,000	$2,233,000
7	Conversion cost per unit of capacity (row 6 / row 5)	$7,500	$7,700
8	Selling and customer-service capacity	110 customers	100 customers
9	Total selling and customer-service costs	$1,100,000	$990,000
10	Selling and customer-service capacity per customer (row 9 / row 8)	$10,000	$9,900
Merrimack produces no defective?machines, but it wants to reduce direct materials usage per D4H machine in 2017. Conversion costs in each year depend on production capacity defined in terms of D4H units that can be? produced, not the actual units produced. Selling and? customer-service costs depend on the number of customers that Merrimack can? support, not the actual number of customers it serves. Merrimack has 77 customers in 2016 and 82 customers in 2017.

1.	Calculate the amount and cost of? (a) unused manufacturing capacity and? (b) unused selling and?customer-service capacity at the beginning of 2017based on actual production and actual number of customers served in 2017.
2.	Suppose Merrimack can add or reduce its manufacturing capacity in increments of 25 units. What is the maximum amount of costs that Merrimack could save in 2017 by downsizing manufacturing? capacity?
3.	Merrimack in? fact, does not eliminate any of its unused manufacturing capacity. Why might Merrimack not? downsize?Select three statements that would explain why Merrimack might not downsize. a. Merrimack may choose not to downsize because downsizing requires a significant reduction in capacity. For? example, Merrimack may have chosen to downsize some more manufacturing capacity if it could do so in increments of? say, 10, rather than 25 units. Merrimack may choose not to downsize because it wants to appear as though it has the capacity to produce many more units for potential customers. Merrimack may choose not to downsize because it projects sales increases that would lead to a greater demand for and utilization of capacity. Merrimack may be focused on product? differentiation, which is key to its? strategy, rather than on cost reduction. Merrimack may choose not to downsize because competitors will view it as a sign of weakness if they downsize.

Answer 1

Part 1

(a) unused manufacturing capacity   

Amount of unused capacity

Capacity in units of D4H at the beginning of 2017.........290

Less: Units of D4H produced and sold in 2017.............225

Unused capacity............................................................. 65

Conversion cost per unit of capacity made available in 2017.............................................................................. × $7700

Cost of unused capacity (65*7700)............................$500,500

(b) unused selling & customer-service capacity   

Amount of unused capacity

Selling & customer service capacity at the beginning of 2017................................................................................……110

Less: Customers serviced in 2017.……………….................... 82

Unused capacity.................................................................. 28

Cost per unit of capacity made available in 2017.......× $9,900

Cost of unused capacity (28*9900)............................$277,200

(c) unused design capacity   

Amount of unused capacity (and related costs) cannot be determined because design costs is a discretionary cost -- there is no direct relationship with the quantity of D4H produced or the number of customers to whom D4H is sold.

Part 2

Merrimack corporation can reduce manufacturing capacity from 290 units to 265 (290 - 25) units. Merrimack

could save $192,500 (25 X $7,700). This is the maximum amount of cost savings from downsizing. If additional downsizing is attempted then Stanmore would not have enough capacity to manufacture the 225 units needed.

Part 3

- Merrimack may choose not to downsize because downsizing requires a significant reduction in capacity. For example, Merrimack may have chosen to downsize some more manufacturing capacity if it could do so in increments of say, 10, rather than 25 units.

- Merrimack may choose not to downsize because it projects sales increases that would lead to a greater demand for and utilization of capacity.

- Merrimack may be focused on product differentiation, which is key to its strategy, rather than on cost reduction.