Question

Winona Johnson is the president of Johnson Mfg., which manufactures coats. She is trying to decide whether to make 3,000 Type III coats or purchase them from a subcontractor to fill a rush special order that she just received. There are no marketing costs on the special order. Acceptance of the special order would not necessitate any premium pay for overtime work or additional fixed costs. Johnson Mfg. has supplied the following data:

Cost Data for type III Coats

Sales Price                              $42

Direct Materials                      15

Direct Labor                            9

Fixed Mfg Overhead              3

Variable mfg Overhead           6

Variable Marketing Costs        3

Fixed Marketing Costs           1

Fixed Admin Overhead          2       

C Discuss the options Ms. Johnson is facing, incorporating the information from parts A and B.

Here are A and B for background

A What are the potential strategic issues related to this decision?

B In addition to the cost information presented in the case, what other data would benefit Ms. Johnson as she makes her decision?

Answer 1

A What are the potential strategic issues related to this decision?

Answer: The potential strategic issued related to this decision is regarding at what per unit purchase price would Ms. Johnson be indifferent as to whether the firm purchase coats from a subcontractor or manufactured the coats. Johnson would be indifferent as to purchasing or manufacturing the coats at $30 (= 15 + 9+ 6 = $30)

B In addition to the cost information presented in the case, what other data would benefit Ms. Johnson as she makes her decision

Answer: For competitive benefit, Johnson might decide to use a sub-contractor for maintaining strong relationship with the supplier. This can be beneficial to Johnson because sub-contractor may provide information on special orders or seasonal demands. She may also decide to manufacture the coats for keeping busy the facility due to her concerns for quality, or employee morale