Terrell Manufacturing: Buying a Machine
(4 pages of text)
Terrell Manufacturing (Terrell) was a small-scale producer of manifolds in Cleveland, Ohio. In late 2015, one of its clients decided to outsource the manifolds it had been producing in-house and approached Terrell with a proposal: Terrell could buy its equipment and produce the manifolds for the client. Terrell needed to quote a production rate based on the hourly cost of operating the equipment to make the client's manifolds. The rate needed to include the total cost of production, which involved processes in addition to those that were carried out on the purchased equipment. Terrell also needed to propose a payment plan for the machine.
This case is intended to be used at the undergraduate or graduate level in a management accounting or financial management course. After working through the case and assignment questions, students will be able to
- determine the incremental costs and benefits associated with proposed solutions;
- determine the full cost for a cost-plus bid and evaluate the proposal as a capital budgeting problem;
- visualize the asking price from the perspective of the other party for profit maximization and for the advantage of both parties;
- plan for cost negotiation with the other party;
- conduct a sensitivity analysis to verify the risk of the proposal; and
- view the proposal in the context of the business strategy.
United States, 2015
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