Introduction to Financial Management

Capital Budgeting Techniques

Mueller-Lehmkuhl (ML), a company incorporated in the Germany, which was established in 1876 as a manufacturer of shoes accessories. Mueller Lehmkuhl expands its product range by including simple as snap fastener. Mueller-Lehmkuhl merged with a company called Weiser Hannover. In 1929, also it merged with Felix-Lehmkuhl and became Mueller-Lehmkuhl. In 1938, it was acquired by the Mosel hammer group. In addition, a joint venture with the German subsidiary of Atlas Group, an American multinational was formed. Atlas consisted of six large companies, one of them – Clothing Fasteners – Mueller-Lehmkuhl supplemented. Atlas Germany maintained a broader customer base. The goal was to integrate the technological superiority of money laundering and higher margins with access to Atlas in the market. As a result of the merger, Mueller-Lehmkuhl has substantially increased its turnover and had estimated revenues of $ 103 million.

Product Description

The products that were developed by the Mueller-Lehmkuhl are used to replace the button and buttonholes. The product line of fasteners consists of 700 different product lines consists of S-Spring socket snap fasteners, ring socket snap fasteners, two open prong snap fasteners, and tack buttons. Each of these products has their own unique specifications. On the other hand, Mueller Lehmkuhl also manufactures the attaching machines. About six machines were manufactured by the Mueller Lehmkuhl among which there are manual and there are automatic. These automatic machines were used to produce high volume of Fasteners. Mueller Lehmkuhl has the policy to sell the existing old machines and acquire the new automatic machines. However automatic machine require costly maintenance as compared to the manual machines, this maintenance cost is estimated $2000.

Answer # 1   

Answer # 1- A Material OH burden rate

The material overhead burden rate of Mueller-Lehmkuhl is calculated by dividing the material overhead rate by its activity measure. The material OH burden rate is calculated to be $2000.

Answer # 1- B  Machine OH burden rate for stamping machine 

The machine overhead burden rate of ML is calculated by dividing the machine overhead rate by its activity measure. The material OH burden rate is calculated to be $4. 

Answer # 1- C  Machine OH burden rate for assembly machine

The machine overhead burden rate of ML is calculated by dividing the machine overhead rate by its activity measure. The material OH burden rate is calculated to be $6. 

Answer # 1- D  Total budgeted general OH for department S1

Total Budgeted General OH spending for fastener production Department S1 for 1987 is calculated to be $200000.

Answer # 1- E  Total budgeted general OH for department A3

What is the Total Budgeted General OH spending for fastener production Department A3 for 1987 is calculated to be $180000.

Answer # 1- F  Total budgeted general OH for department F7

What is the Total Budgeted General OH spending for fastener production Department F7 for 1987 is calculated to be $120000.

Answer # 1- G Standard Cost of batch of Fastener XP76

The standard cost of a batch of Fastener is computed to be $42000.

Answer # 2 Accounting Policy of Mueller Lehmkuhl

Mueller-Lehmkuhl follows the accounting practice in such a way that it attaches all the cost of the machine into the cost of the fastener. The general overhead of the Mueller-Lehmkuhl consists of the component of engineering, material, etc. this practice generally consists of allocating the cost of the fastener inventory rather than allocating the cost of the machine inventory.

The product of the Mueller-Lehmkuhl was charged directly after the adjustment of the material. The new Mueller-Lehmkuhl costing system also identifies a charge material overhead. This includes the cost associated with purchasing, materials handling, and storage of inventory. The products material overhead on the basis of the materials consumed dollars were also allocated.

In the department of stamping and assembly of Mueller-Lehmkuhl, labor costs, is divided by the number of the machine being operated in Mueller-Lehmkuhl, and they were charged directly to each of the production costs. Settings labor costs, then divide by lot size to produce a setup charge by, they were also directly charge for the product. Overhead was divided into two sections: the machine costs and overall cost of the product of Mueller-Lehmkuhl. The cost of the machine was significant costs that could be assigned directly to the machine: floor space, maintenance, energy, an interest charge for invested capital and depreciation. The total cost of these items for each kind of machine which is then divided by the direct labor dollar projected, including the cost of installation, which is expected to be working in that kind of rate machine to machine overload class direct labor dollar for the next following year. The rate resulting from machine load multiplied by the contents of hand dollar standard direct labor for each product to give the top machine related product cost.

The portion of the general overhead of Mueller Lehmkuhl mostly consists of technical management, factory support, machine cost department, plant equipment, support department cost. The cost of general department is allocated in such a way that they were assigned to each department based over the direct labor cost, including its cost configuration. The cost pool for each of the department for the next following years is based over the rate of overtime of the production machine. . The resulting loading rate is multiplied by the department dollar labor content standard direct labor for each product to give the part related overhead- overall product cost.

In order to reflect the true picture of the cost and to implement a sound cost accounting system, Mueller Lehmkuhl should implement activity based costing method, which allocates manufacturing overhead costs to the products in a more logical way than the traditional approach of simply assigning costs based on machine hours. Activity Based Costing first assign costs to activities that are the real cause of the overload.

Answer # 3 Separate Budget Income 

Budget income in the income statement is the real income, total profit from the sale of fasteners and selling and renting fixing machines would be $ 9.5 million. The total cost of manufacturing of fasteners, which is $ 69,630,604. The research and development cost of the Mueller Lehmkuhl in the proportion of Fastener is computed as 2/3 of the total cost. By adding the costs of administration and sales to manufacturing costs, the total cost of production is $ 90,223,738. Thus making Mueller Lehmkuhl profit on the sale of fasteners is $ 5,767,262; and the profit from the sale and rental of machines fixation is $ 3,733,738.

Answer # 4 Product Having Higher Profitability.

The production of fasteners provides higher profitability of $5776262 to Mueller Lehmkuhl, and the production of machines generates the profitability of $3723738. The total cost of the fasters was calculated as $90223738 which include the cost of research and development of $20593134. On the other hand the total cost of the machines was $3226000.

Answer # 5 Hiroto Industries Initiatives

The initiatives taken by the Japanese company must be considered, as another competitor is emerged in the European market which can disrupt the sale of Mueller Lehmkuhl. Hiroto Industries sells fasteners price 20% lower than that of Muller Lehmkuhl, with products of the same quality. Mueller Lehmkuhl fasteners that were offered to mount compatible only with fixing machines, but Hiroto Industries manufactured fasteners that are compatible even with fixing machines Lehmukuhl Muller. This support and a better range of prices offered by the Hiroto Industries make customers drifting slowly fasteners Japanese manufacturer. Therefore, this has also had become a better deal for distributors, who later preferred Japanese manufacturing.

Answer # 6 Initiatives Taken to Overcome the Threat

  1. Mueller Lehmkuhl was mixing the price fixing machines with their Fastener price, if its prices are not mixed, then the fastener prices will finally come down.
  2. Fasterner price can be reduced by 20% without compromising the quality of fasteners products. Mueller Lehmkuhl will still make a profit range of 38% – 48% in its product range
  3. As Mueller Lehmkuhl had a strong R & D, fastener products can be innovated which can be easily installed without the aid of any machine fixing.
  4. Mueller Lehmkuhl can update the attaching machines by making it compatible with the fasteners manufactured by different manufacturers on the market, therefore, a separate market is created for ML attaching machines.
  5. Loyalty rewards can be given to the Mueller Lehmkuhl customers who meets the standards of loyalty, also a better purchase price can be offered these customers for a wide range of orders.