Classic Cabinets has one factory in which it produces two product lines. Walter manages th...

Classic Cabinets has one factory in which it produces two product lines. Walter manages the Wood Division, which produces wood cabinets, and Mary manages the Metal Division, which produces metal cabinets. Estimated unit production costs for the two types of cabinets are as follows:

At the end of the year, total overhead costs are allocated to each division based on direct labor hours used. A breakdown of estimated yearly overhead costs is as follows:

Demand for cabinets over the past several years has been steady and is not expected to change. The Marketing Department estimates that approximately 10,000 wood cabinets and 7,500 metal cabinets will be sold each year for the foreseeable future. Each manager’s performance evaluation is based on the total production cost per unit for his or her product line. The manager that succeeds in reducing unit costs by the greatest amount from those estimated will earn a bonus.

Mary is considering purchasing a new machine for $500,000 that will last approximately 10 years and have no salvage value. If the machine is purchased, the direct labor required to produce a metal cabinet will be reduced to 2.5 hours.

Instructions

a.If the machine is purchased, what will be the total unit costs of production for each type of cabinet, assuming all other cost and production estimates are correct?

b.From Mary’s point of view, should the machine be purchased? Discuss whether Mary and Walter should be given sole authority over which equipment to purchase for their respective divisions.

c.What information do you think is necessary to decide whether to purchase the machine?

d.If the machine is purchased, do you think the performance evaluation of Walter and Mary will be accurate and fair under the current system?