Question

A small plastic airplane that can purchased at a store for $6

Plastic models of this type are made using an injection molding machine. A die is created out of special steel in the shape of the vehicle. Other molds are used for the wheels and other parts. Molten plastic, usually styrene, is pumped into the mold under pressure which forms the body of the vehicle. It is ejected from the mold, allowed to cool and then is later painted, assembled, boxed and sold. Items like this are normally sold to specialized distributors who sell to the hobby shop retailers. The hobby shop would usually pay about 50% of the retail price and the distributor would pay approx. 60% of the price the retailer paid. In selling the model, the manufacturer would typically make a gross profit of 33.3%, meaning its cost of the item is $1.20.

Assume that the cost of the die is $10,000 and it can be used to make 25,000 models before it wears out. If produced in house, the unit cost of the styrene material is $.10; the unit costs of painting each model are $.05 fixed and $.05 variable. The plastic box it is sold in costs $.15. The rest of the unit costs are split 2/3 fixed and 1/3 variable. The model can be produced in lots of 5,000 as warranted by sales demand.

A Mexican toy company has offered to supply the completed model for $.90 each plus $.15 for shipping, custom duties etc. provided the US company orders and pays for all 25,000 models at one time. If purchased from the Mexican company, no US worker would lose their job but there could be reduced overtime for the employees.

REQUIRED:

1) Describe the process the US company should use to critically evaluate whether or not to accept the offer from the Mexican company.

2).Prepare a schedule showing unit costs [fixed & variable] of the model and breakeven sales in $ and units IF the US company manufactures the model car and sells it to the distributor.(show your work)

Answer 1

Calculation of COst of US Manufacturer

Cost of the Die	10000
Units Produced	25000
Cost per unit	0.4
	Per Unit Cost	Fixed	Variable
Cost of Die	0.4	0.27	0.13	6,666.67
Styrene Material	0.1	0.07	0.03	1,666.67
Painting	0.1	0.05	0.05	1,250.00
Plastic Box	0.15	0.10	0.05	2,500.00
	0.75	0.48	0.27	12,083.33
No of Units		25000
Total Fixed Cost		12083

Option A: Produced in US
Sellin Price		1.2
Cost		0.75
Profit		0.45
Option B: Purchased from Mexican Company
Sellin Price		1.2
Cost		1.05
Profit		0.15

Since Profit in Option A is more, they should manufacture the product in US.

Break Even Point

Schedule of Units cost is shown above. Based on it the Break Even Point in UNits

Sellin Price		1.2
Variable Price		0.27
		0.93
BEP in units		12,946 units

Break Even Sales = 12083$