Case 16-1:

Jamie Kincade
Anthony & Reece: ACCOUNTING Text and
Cases, McGraw-Hill, New York, 1989
Case 16-1: Jamie Kincade (1)
Jamie Kincade was supervisor of an
assembly department in Chelsea Electronics
Company. In recent weeks, Kincade had become
convinced that a certain compoonent, number J-
42, could be produced more efficiently if certain
changes were made in assembly methods.
Kincade had described this proposal to the
companys industrial engineer, but the engineer
had quickly dismissed Kincades idea mainly,
Kincade thought, because the engineer had not
thought of them first.
Case 16-1: Jamie Kincade (2)
Kincade had frequently thought of starting a
business and felt that theability to produce the J-42
component at a lower cost might provide this
opportunity. Chelseas purcahsing agent assured
Kincade that Chelsea would be willing to buy J-42s
from Kincade if the price were 10-15 percent below
Chelseas current cost of $2.97 per unit. Working at
home, Kincade experimented with the new
methods, which were based on the use of a new
fixture to aid in assembling each J-42. This
experimentatiion seemed successful, so Kincade
proceded to prepare some estimates for large-scale
J-42 production. Kincade determined the following:
Case 16-1: Jamie Kincade (3)
1. A local toolmaker would make the new fistures for a price
of $900 each. One fisture would be needed for each
assembly worker.
2. Assembly workers were readily available, on either a full-
time or part-time basis, at a wage of $6.75 per hour.
Kincade felt that another 20 percent os wages would be
necessary for fringe benefits. Kincade estimated that on
the average (including rest breaks), a worker could
assemble, test, and pack 15 units of the J-42 per hour.
3. Purchased components for the J-42 should cost about
$1.53 per unit over the next year. Shipping supllies and
delivery costs would amount to apoximately $0.09 per unit.
4. Suitable space was available for assembly operations at a
rental of $1,080 per month. A 12-month lease was
required.
Case 16-1: Jamie Kincade (4)
5. Assembly tables, stools, and other necessary
equipment would cost about $540 per assembly
worker.
6. Kincade, as general manager, would receive a salary of
$3,600 per month.
7. A combination office manager-book keeper was
available for a salary of $1,260 per month.
8. Miscellaneous costs, including maintenance, supplies
and utilities, were expected to average about $855 per
month.
9. Chelsea Electronics would purchase between 400,000
and 525,000 units of J-42 a year, with 450,000 beinmg
Chelseas purchasing agents best guess. However,
Kincade would have to commit to a price of $2.52 per
unit for the next 12 months.
Case 16-1: Jamie Kincade (5)
Kincade showed these estimates to a friend
who was a cost analyst in another electronics firm.
This friend said that all of the estimates appeared
reasonable, but told Kincade that in addition to the
required investment in fixtures and equipment,
about $125,000 would be needed to finance
accounts receivable and inventories. The friend also
advised buying enough fixtures and other
equipment to enable producing the maximum
estimated volume (525,000 units per year) on a
one-shift basis (assuming 2,000 labor-hours per
assembler per year). Kincade thought this was good
advice.
Case 16-1: Jamie Kincade (5)
Questions



1. What are Kincades expected variable costs per unit? Fixed costs per
month? What would the total costs per year og Kincades business be if
volume were 400,000 units? 450,000 units? 525,000 units (Limit yourself
to cash costs: ignore depreciation of fixtures and equipment. Also,
disregard any interst costs Kincade might incur on borrowed funds.)
2. What is the average cost per unit of J-42 at each of these three volume?
3. Reanswer Questions 1 and 2 assuming that (1) Kincade wanted to
guarantee assembly workers 2,000 hours of pay per year; (2) enough
workers would be hired to assemble 450,000 units a year; (3) these
workers could work overtime at a cost (including firnges) of $12.15 per
hour; and (4) no additional fixed costs would be incurred if overtime
were needed. (Do not use these assumptions for Qustion 4.)
4. Reanswer Questions 1 and 2, now including depreciation as an expense.
Assume the fictures and other equipment have a usefull life of six years,
and that straight-line depreciation will be used.
5. Do you think Jamie Kincade should resign from Chelsea Electronics and
establish the proposed enterprise?