Accounting Questions

Accounting Questions

Imaging Systems Division (ISD), the Heidelberg Division (Heidelberg), and the Electronic Components Division (ECD). ISD was one of Heidelberg’s major inside customers.

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In 2020, ISD designed a new ultrasound imaging system, called the X73. The new system offered users advantages in processing speed and cost, and it took up less space. Heidelberg engineers participated in the design of X73, but Heidelberg was compensated for the full cost of the time its employees spent on this project.

After the specifications were set, ISD managers solicited bids for the materials needed to produce X73 components. Heidelberg was asked to bid to supply the displays needed for the production of the X73 system. So were two outside companies (Bogardus NV & Display Technologies). The quotes that ISD received were as follows:

Supplier                                       Cost per X73 system

Heidelberg Division                     €140,000

Bogardus NV                               €120,500

Display Technologies Plc             €100,500

The following facts came out:

a. ISD’s tentative target price for the X73 system was € 340,000.

b. Heidelberg’s standard manufacturing cost (material, labor and overhead) for each display system was €105,000, while the variable portion of this total cost was only €50,000.

c. Because of the global business slowdown, the production lines at Heidelberg that would produce the systems in question were operating at approximately 70% of capacity. In preceding year, monthly production had ranged from 60-90% of total capacity.

d. Heidelberg’s costs included €21,600 in electronic subassemblies to be supplied by ECD. ECD’s full manufacturing costs for the components included in each system were approximately €18,000, of which approximately half were out-of-pocket costs. ECD’s standard policy was to price its products internally at full manufacturing cost plus 20%. The mark-up was intended to give ECD an incentive to supply its product internally. ECD was currently operating at 90% capacity.

Required (Make sure to show your work for partial credits!):

Q1.   What is the difference in the cash outflow to Zumwald of the sourcing alternatives (i.e., internal vs. outsourcing)?

Q2.  Which alternative makes Zumwald better off?

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