INTRODUCTIONThe vice president at your company, Columbia Holdings, has given you a new assignment: “Recently I asked the folks at Patterson Manufacturing to develop a strategy for improving their profitability. They have responded with a proposal. I want you to evaluate the proposal: Is it viable? Is it sustainable? Visit their operations and bring back a recommendation.”As you travel to the site you review a brief history of the firm. Patterson Manufacturing was founded in a small northeastern city more than a century ago. Wesley Patterson started the firm alongside a fast-moving stream that provided mechanical power to drive cutting tools, grinders, lathes, and polishers. These tools were used to produce precision parts other manufacturers needed. The firm quickly established a reputation for producing high-quality products to exacting tolerances. The firm prospered.Wesley studied the industries he served to develop new products that could fill his customers’ emerging needs. He often met with customers to design unique products for them. He referred to his approach as providing “customer-driven creative solutions.” He also kept abreast of new manufacturing materials and technology to ensure his products were of the highest quality.The firm grew steadily and, by 1925, was (and still is) the community’s largest employer. Wesley donated the land that is now the city’s central park. He also paid for constructing the first municipal buildings. More recently, the company was the primary donor for the construction of the municipal library and the local hospital. And the taxes paid by the firm and its employees are responsible for an excellent array of community services, including the Patterson Sports Complex and Patterson Community Center. The Great Depression in the 1930s brought hard times to the company, yet none of its employees were discharged. Instead, the firm and its employees cooperated to spread the available work among its employees by reducing each individual’s working hours (and wages). During that time, the firm also suspended paying dividends to its owners. After the company returned to prosperity in the 1940s, it continued to emphasize customer-driven creative solutions, and its loyal workforce enthusiastically overcame product design challenges. Wesley passed leadership of his business to his son, who later passed it down to Wesley’s grandson, and then to Wesley’s great granddaughter, Jessica Patterson. But five years ago, when Jessica wanted to retire, there was no heir willing to take over the business. Consequently, the plant was sold to your employer, Columbia Holdings.BACKGROUNDColumbia invests in family-owned businesses with a strong presence in niche markets. Columbia retains existing management and local business practices but provides centralized services, such as finance, accounting, insurance, IMA EDUCATIONAL CASE JOURNAL VOL. 6, NO. 4, ART. 1, DECEMBER 20131ISSN 1940-204XPatterson ManufacturingShane MoriarityUniversity of Oklahoma and Unitec New ZealandAndrew Slessor Unitec New Zealand

and corporate-level management. Patterson has remained profitable since the acquisition, but its return on investment has been declining. Your first stop at the Patterson complex is a meeting with the controller. He provides some additional background: “Jessica, like her predecessors, spent most of her time with customers developing new products to meet customer needs. She didn’t concern herself with costs. Customers were willing to pay for products that solved problems. Upon Jessica’s retirement, Columbia appointed Paul, our former production manager, to CEO. Paul has done wonders in rationalizing and standardizing our product lines. He substantially reduced manufacturing costs, which led to record profits in the two years following the sale of the company. Those early results have apparently set high expectations for our continuing performance. Our proposal will help move us toward meeting those expectations,” he said.“Our proposal is to stop manufacturing our largest-selling product, the Gudgeon EH40, and instead acquire it from an overseas supplier,” continued the controller. “This product currently represents 30% of our total sales revenue and production volume. But sales have been declining because competitors are offering a similar product at lower prices. We think that by reducing our price by 5% we can increase our unit sales volume by 15%. The increased volume coupled with a lower product cost from the offshore supplier should nearly double our firm-wide profit.”The controller also provided some supporting documents. Exhibit 1 summarizes operations for the five years since Patterson Manufacturing was sold to Columbia Holdings. Year 1 represents the first full year after Jessica retired, and Year 5 is the year that just past. Exhibits 2, 3, and 4 provide an income statement for Year 5, the current employee staffing levels by job title, and a detailed price proposal from the overseas supplier.The controller continued: “The analysis is pretty straightforward. Sales of the Gudgeon EH40 were $27 million last year. The direct material costs came to $14.3 million, while overhead costs of $4.2 million were allocated to the product. But only $2.9 million of the overhead will be avoided if we stop manufacturing the Gudgeon EH40. The remaining overhead costs are nearly all fixed and not subject to reduction in the near future. Our direct selling costs consist mostly of an 8% commission paid to sales representatives. In addition, there’s a $2 million advertising allowance devoted to promoting the Gudgeon EH40 in trade magazines.”He also said, “By outsourcing the Gudgeon EH40, we can release three administrative managers, eight administrative support staff, 128 general production personnel, and 10 supervisors.The firm will incur a one-time charge of $1 million for severance pay and pension contributions for dismissed employees. We’ll also need to spend $200,000 for the construction of receiving facilities for the outsourced product.”The controller continued: “The supplier’s cost quotation (Exhibit 4) needs to be adjusted for the expected 15% increase in volume. The cost for materials and labor will increase proportionately, but the overhead and ‘other’ costs are unlikely to be affected. The supplier’s mark-up will be 10% of the new total cost. In addition to the product cost, Patterson will incur transportation costs to get the product from the manufacturer to our warehouse. The transportation costs are variable and would have been $0.6 million for the volume of product in Year 5.”THE TASKAfter his brief overview, the controller hands you the exhibits and says, “You should go through the numbers yourself to ensure that my projection for the increase in profit is correct.” As you make your way to an empty office to review the numbers, the marketing manager approaches you. She pleads, “Don’t let them do this. The proposed action will deal a devastating financial blow to our community. Wesley Patterson would have never approved such a move. He loved this town.

Exhibit 1:
Patterson Manufacturing Five-Year Summary of Operations

Total Revenues

Net Income

Domestic Sales

International Sales

Sales of Established Products*

Sales of New Products*

Research and Development

Return on Assets

Number of Employees

Year 5

$90.2

$3.1

$74.7

$15.5

$73.9

$16.3

$0.9

2.0%

480

Year 4

$94.9

$3.8

$76.9

$18.0

$75.1

$19.8

$1.1

2.3%

485

Year 3

$99.1

$4.4

$79.3

$19.8

$74.4

$24.7

$1.5

2.7%

502

Year 2

$106.2

$7.3

$85.0

$21.2

$76.3

$29.9

$1.2

4.1%

492

Year 1

$111.4

$7.5

$88.1

$23.3

$76.6

$34.8

$1.3

4.2%

510

Note: Dollar figures are in millions.
*Established products are those that have been marketed for five years or more. New products have been marketed for less than five years.

Exhibit 2:
Summary Income Statement for Patterson Manufacturing

Sales

Cost of Goods Sold (COGS)

Gross Margin

Administrative Costs

Selling Costs

Operating Income

Year 5

$90.2

74.3

15.9

1.6

11.2

$ 3.1

Note: Dollar figures are in millions. Interest expense and income taxes are only shown on Columbia’s consolidated financial statements.

Exhibit 3:
Distribution of Current Patterson Employees by Job Title

Job Title

Administrative Manager

Administrative Staff

Production Supervisor

General Production Personnel

Number of Employees

10

24

29

417

Average Salary Per Employee

$45,000

32,000

50,000

37,000

Exhibit 4:
Off-Shore Supplier’s Price Proposal for the Volume of Product in Year 5

Material Costs $12.7

Labor Costs 1.8

Overhead Costs 2.7

Other 1.5

Total 18.7

Profit Mark-Up (10%) 1.9

Total Price $20.6

Note: Dollar figures are in millions. The total price is quoted for supplying the quantity of product Patterson sold in Year 5. The quoted price is FOB the supplier’s manufacturing plant.

Questions:

1. Using the controller’s projections, prepare an analysis of the expected effect of outsourcing the product on Patterson’s profitability.

2. Would it be a viable alternative to produce the product locally and lower the price to achieve the increase in sales volume?

3. Does the firm have an obligation to maintain employment levels in the town?

4. What risks are associated with the proposal?

5. Make a recommendation to your vice president on whether the proposal should be accepted. Provide your reasoning and any suggestions for additional or alternative actions that Patterson should take.

Cost of Production in the Short-run. SHOW FORMULA IN EXCEL

Price of Labor (L) is PHP 100 while Price of Capital (K) is PhP 50. What is the best cost-minimizing combination of K and L?

1. Using the following information answer the question listed below.

ABC corp needs to figure out cost information pertaining to product D.

Direct labor                      $60,000

Direct Materials              45% of OH

Overhead                         92% of direct labor

Number of products produced   400 units

What is the cost of direct materials?

What is the cost of overhead?

What is the total cost of production?

What is the per unit cost?

What is the total prime cost?

What is the per unit prime cost?

What is the total conversion cost?

What is the per unit conversion cost?

What would be the selling price per unit if I need a 35% markup?

2. Using the following please answer the questions below.

Direct materials                             $35,000

Direct Labor                                   3,500 hours @ $14.00 per hour

Overhead                                        65% of Direct materials

Total units produced                    700

What is the total prime cost?

What is the per unit conversion cost?

What would the selling price per unit if you need 45% markup?

Question 3

Answer the question on the basis of the following information.  

The marginal product of the fourth worker

is 7¹/₂.

is 7.

is 5.

cannot be calculated from the information given.

Question 4

At any level of output.

Question 6

Other things equal, if the wage rates paid to a firm's labor inputs were to rise, we would expect the

Question 8

If the total variable cost of 9 units of output is $90 and the total variable cost of 10 units of output is $120, then

8. Explain how the movement of the convection fluid as it heated up relates to masses of heated air.

9. What do you expect will occur as air masses move over cold locations? Hot locations? Explain how this movement of air masses influence climate.

10. Describe how the qualities of air masses differ depending on whether they form over land or over an ocean.

11. What climate would regions where air masses from the equator and the poles collide probably have?

12. Carbon dioxide is a greenhouse gas that causes excess solar energy to be trapped in the form of heat in the atmosphere. Discuss how carbon dioxide may affect convection currents.

13. Although it is near the Atlantic Ocean, the northwest coast of Africa is characterized by hot, dry deserts. However, the Caribbean, at approximately the same latitude, possess a hot, moist climate and even supports rainforests. Using knowledge of the Coriolis Effect and air currents explain why this is true.

14. Describe how rising and sinking air (high and low pressure) in the atmosphere explains deserts near 30°N and 30°S.

15. Air in the troposphere is heated from the bottom up by heat given off by the surface of the earth. If the sun shines equally on Seattle (near water) and Bismarck, North Dakota, explain which would get hotter during the day.

· Question 10

· Question 11

· Question 12

Steve and Sons Solar Panels has a production function of Q = 4KL and faces a wage rate of $8 per hour and a rental rate of capital of $10 per hour. Assume that, in the short run, capital is fixed at K = 10.

a. Derive the short-run total cost curve for the firm.
b. Derive expressions for the firm’s short-run average total cost, average fixed cost, average variable cost, and marginal cost.

c. Derive the long-run expansion path function for the given production function. d. Derive the long-run total cost curve for the firm.
e. Derive expressions for the firm’s long-run average total cost and marginal cost.

A manufactured product has the following information for August.

(1) Compute the standard cost per unit.
(2) Compute the total budgeted cost for production in August.
(3) Compute the total cost variance for August. (Indicate the effect of each variance by selecting for favorable, unfavorable, and no variance)

A manufactured product has the following information for August.

(1) Compute the standard cost per unit.
(2) Compute the total budgeted cost for production in August.
(3) Compute the total cost variance for August. (Indicate the effect of each variance by selecting for favorable, unfavorable, and no variance)

*Total budgeted cost