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How much will the additional cash the company will have be

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Question - A furniture selling company in Australia sources their sofas from Vietnam due to low production costs. However, they are currently keeping a lot of inventory as safety stock due to the long lead times sourcing from China. The company is thinking whether it is worth exploring local production from one of the well known suppliers who can support their volume so they can free up some cash. They can reduce the amount of inventory the maintain from 8 weeks to just 2 weeks worth if they source locally. The company currently sells 2,000 units per week. Here is the information that the company is comparing:

Imported from Vietnam

Production Cost: $150.00 per unit

Shipping Costs: $20,000.00 per container van (200 units each full CV)

Locally produced in Australia

Production Cost: $300.00 per unit

Shipping Costs: $5,000.00 per truck (100 units each full truck)

If within 2 years, the additional costs to producing locally would deplete the additional cash freed up from shifting to Australia, then the shift may not be worth it. The company wants answers to the following questions:

1. How much will the additional cash the company will have be if they shift to local production?

2. Is it worthwhile shifting in the long run? Why or why not?

Reference no: EM133097442

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