Acc Ch7

Managerial Accounting - Online

Chapter 7 - Memo

Name: Nicholas Blunden

Mary Monds is a production manager at a metal fabrication plant.  Last night she read an article about a new piece of equipment that would dramatically reduce her division's costs.  Mary was very excited about the prospect, and the first thing she did this morning was to bring the article to her supervisor, Stephanie Popeel, the plant manager.  The following conversation occurred:

Mary:  Stephanie, I thought you would like to see this article on the new PDD1130; they've made some fantastic changes that could save us millions of dollars.

Stephanie:  I appreciate your interest Mary, but I actually have been aware of the new machine for two months.  The problem is that we just bought a new machine last year.  We spent $2 million on that machine, and it was supposed to last us 12 years.  If we replace it now, because the old machine was custom built, we will not be able to recoup any of our original $2 million outlay. If I go to top management now and say that I want a new machine, they will fire me.  I think we should use our existing machine for a couple of years, and then when it becomes obvious that we have to have a new machine, I will make the proposal.

Instructions:

    Mary just completed a course in managerial accounting, and she believes that there is a flaw in Stephanie’s thinking.  Write a memo from Mary to Stephanie explaining Stephanie's decision making error.

Memo on next page

MEMO

To: Stephanie

From: Mary Monds

Date: 3/7/15

Subject: PDD1130

This memo is in regards to our recent discussion about the new equipment PDD1130. While I understand your concerns about the costs and repercussions of purchasing this equipment, I’d like to illustrate why I believe PDD1130 would result in savings for our company even considering the sunk cost of our recently purchased equipment,

While it is true that we would incur an initial sunk cost...