Contract Between Tri-Star and Mowerson: What Should be Considered?

Week 1 Case Study
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Question a
The contract between Tri-Star and Mowerson is a long-term one while the production volume of Mowerson is expected to grow during the time of the contract. As a result, Wright should have assessed costs and savings that will be realized in more than one period. Since it is a long-term decision, Wright should have considered production capacity, changes in income generation. Wright should also have considered that once the technicians are fired, they cannot be re-hired. Identifying the costs and savings linked to these considerations for a greater period than 2002 would have allowed Wright to realize the time value of money using discounted cash flow techniques.
Question b (i) and (ii)
Reduction in assembly technicians
Appropriate; Mowerson will not be incurring their wages once the contract is signed
Correct; it is the expense that is associated with the 40 technicians
Assembly supervisor transferred
Inappropriate; the supervisor will work at Mowerson for another 2 years
Correct; the amount is correct but does not contribute to the savings because the supervisor will still be at the company
Floor space saving
Appropriate; the appropriateness only relates to the space in the rental premises. Including the main building floor space is inappropriate because it will be used as a stockroom and reclaimed to for manufacturing use
Incorrect; the cost related to the main building floor space will be incurred because it will be used. The correct amount is; $9.50 * $1000 = $9, 500
Purchasing clerk
Inappropriate; the clerk is on a short-term task but is and will still be an employee of Mowerson
Incorrect; the purchasing clerk is still an employee, hence no saving related to him/her
Purchase order reduction
Appropriate; decrease in purchases will result into savings
Correct; the calculation is accurate based on the available data
Reduced freight expense
Inappropriate; tri-Star incorporated freight expenses in the prices of the PCBs, which Wright captured in item 7. Therefore, freight expe...