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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Paladin Company manufactures plain paper fax machines in a small factory in Minnesota Sales have increased by 50% in each of the past 3 years, as Paladin has expanded its market from the United States to Canada and Mexico. As a result, the Minnesota factory is at capacity. Beryl Adams, president of Paladin, has examined the situation and developed the following alternatives:

  1. 1. Add a permanent second shift at the plant. However, the semiskilled workers who assemble the fax machines are in short supply, and the wage rate of $15 per hour would probably have to be increased across the board to $18 per hour in order to attract sufficient workers from out of town. The total wage increase (including fringe benefits) would amount to $125,000. The heavier use of plant facilities would lead to increased plant maintenance and small tool cost.
  2. 2. Open a new plant and locate it in Mexico. Wages (including fringe benefits) would average $3.50 per hour. Investment in plant and equipment would amount to $300,000.
  3. 3. Open a new plant and locate it in a foreign trade zone, possibly in Dallas. Wages would be somewhat lower than in Minnesota, but higher than in Mexico. The advantages of postponing tariff payments on imported parts could amount to $50,000 per year.

Required:

Advise Beryl of the advantages and disadvantages of each of her alternatives.

To determine

List the advantages and disadvantages of the alternatives..

Explanation

Foreign Trade Zone:

Foreign trade zone are the areas declared as FTZs that are located in a home country, however these are treated like foreign areas for the purpose of levying duties and taxes.

Advantages and disadvantages of each alternative are listed as follows:

AlternativeAdvantagesDisadvantages
1. Second shift

Easy to adopt.

This option would be beneficial in case, short term solutions are required.

Lesser funds are required, than establishing another plant.

Costs associated with management and operation of other plant would be saved.

Dissatisfaction of existing workers due to lower wages.

Over use of plant and machinery may reduce their useful life.

Increase in transport and other costs for sales to be made in country MX.

2. Plant in MX

Reduction of labor costs...

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