Question

Problem 13-11

One of your Taiwanese suppliers has bid on a new line of molded plastic parts that is currently being assembled at your plant. The supplier has bid $0.10 per part, given a forecast you provided of 200,000 parts in year 1; 300,000 in year 2; and 500,000 in year 3. Shipping and handling of parts from the supplier’s factory is estimated at $0.01 per unit. Additional inventory handling charges should amount to $0.005 per unit. Finally, administrative costs are estimated at $20 per month.

     Although your plant is able to continue producing the part, the plant would need to invest in another molding machine, which would cost $10,000. Direct materials can be purchased for $0.05 per unit. Direct labor is estimated at $0.03 per unit for wages plus a 50 percent surcharge for benefits and, indirect labor is estimated at $0.011 per unit plus 50 percent benefits. Up-front engineering and design costs will amount to $30,000. Finally, management has insisted that overhead be allocated if the parts are made in-house at a rate of 100 percent of direct labor wage costs. The firm uses a cost of capital of 15 percent per year.

a. Calculate the difference in NPVs between the Make and Buy options. Express all costs as positive values in your calculations. It is suggested to use the NPV function in Excel. (Round your answer to 2 decimal places.)

Difference in NPV            $

b. Should you continue to produce in-house or accept the bid from your Taiwanese supplier?

    

	Accept the bid
	Produce in-house

Answer 1

Solution

Yearly cost if part taken from supplier

Year 1 = 0.1*200000 + 0.01*200000 + 0.005*200000 + 20*12 = $ 23,240

Year 2 = 0.1*300000 + 0.01*300000 + 0.005*300000 + 20*12 = $ 34,740

Year 3= 0.1*500000 + 0.01*500000 + 0.005*500000 + 20*12 = $ 57,740

Total cost = $115720

If the parts are made on own

	year1	year 2	year 3
Capital	10,000
Design cost	30,000
Units	200,000	300,000	500,000
Per unit Material cost	0.05	0.05	0.05
Material cost	10,000	15,000	25,000
Labor cost per unit	0.03	0.03	0.03
Labor cost (direct cost*1.5)	9,000	13,500	22,500
Total cost	19,000	28,500	47,500

The cost of capital is 15%

So,

15% of capital = 0.15*40000 = $6000

Adding this capital to every year , the cost comes to 2500 in year 1, 34500 in year 2, 53500 in year 3, which is lower than the part taken from supplier.

So,

The part should be manufactured inhouse