• Gudeng Precision—Swatting a Fly with a Sledgehammer, Who Should Bear the Cost?

Abstract

In order to be coordinated with their main customers’ technological development schedule, Gudeng Precision decided to establish a production line at the Tainan Science Park of Taiwan to produce the newest 18-inch wafer. However, owing to the delayed technological development schedule of their customer, Gudeng Precision was unable to receive orders on time as expected; these orders were expected to generate a high degree of gross profit. In order to amortize the fixed cost, the business department decided to take on another order, which was low for both the unit price and profit. However, using ERP data analysis, the accounting department found that the new order was not a key product line of Gudeng Precision, and that a loss would be generated for the company; the loss could even be as much as double the cost, causing a serious reduction in profits. The accounting department believes that the company should concentrate on producing their keynote product to prevent any reduction in profits, and that the business department should not accept these low-price orders just to increase their sales. However, the business department believes that the unit price of this new lowprice

product is still within the range of the market price. Additionally, manufacturers in the market who produce these types of low-price products mostly have quite a good return and regard these low-price products as their main products. That is why these companies do not lose money when manufacturing these low-price orders. In short, in this lean season, the business department claims that they should try to receive more orders from the market, even if the unit price is low, in order to increase the sales of the company. Both the accounting and business departments have presented their points of view strongly in front of the CEO of the company. How will this issue be settled?

Keywords: relevant cost, differential cost, incremental cost, cost variance, management by exception