Mueller-Lehmkuhltrades in clothingl fasteners and leasingrelated machines. It looks at these two items as efficiently a unitaryproduct and prices them in the same manner, the fasteners at elevated profit and its attaching machines at a loss. The cost system assigns the cost of the attaching machines to the fasteners. The Japanese have stepped in the market and dicephered a procedure to differentiate between the two products. Conclusively, they are now putting up a challenge against the European manners of conducting business. The case requires the student to assess the true cost and lucrativeness of the items.
Income Statement- Fasteners
Profit Calculation for Attaching Machine
Income Statement- Fasteners if Price reduced by 20%
1. How much profit does Muller-Lehmkuhl make on the sale of fasteners? On the sale and rental of attaching machines?
2. How does the cost accounting system treat the costs of designing manufacturing and re working attaching machines?
3. Exhibit 6 shows the reported product costs for five representative products. How accurate do you think these numbers are? If you think they are inaccurate, what is your best estimate of the product costs?
Note Total budgeted direct labor dollars (including setup) for 1986 were $1.61 million (Exhibit 1). The direct labor dollar content (including setup) of the five representative products is:
S-Spring: $1.32, Ring: $1.43, Prong (B): $0.14, Prong (SS): $0.27, Tack: $0.66
4. What additional information would you like before giving a definitive answer to Question 3?
5. How would you change the firm’s pricing strategy to compete better with the Japanese? Would you implement this change?
6. Should Richard Welkers be worried about the Japanese?