Reference no: EM1373869

Q. 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 forecasted demand 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 $0.05 per unit. Finally, administrative costs are estimated at $20 per month. Although your plant is able to continue producing the part, the plant would desire to invest in another moulding machine, which would cost $10,000. Direct materials can be purchased for $0.05 per unit. Direct labour is estimated at $0.03 per unit plus a 50 percent surcharge for benefits; indirect labour 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 labour cost. The firm uses a cost of capital of 15 percent per year. Illustrate what should you do, continue to produce in-house or accept the bid from your Taiwanese supplier?