Reference no: EM133074452

Question - One of the final stages in the crib manufacturing process is the painting or staining of the wood, referred to as finishing. Management is considering outsourcing the finishing process as a way to add production capacity. SDL has approached ProFinish, a company that specializes in industrial spray painting, to perform the finishing. ProFinish has been in business for five years and has experience painting everything from kitchen cabinets to bicycles. The cribs would be sent to the facility for painting or staining and then sent back to SDL for quality inspection, packing, and shipping. ProFinish has provided SDL with two customer references, both of whom indicated that they were satisfied with the quality and service they have received from ProFinish. The proposal would be for a three-year term with a minimum volume of 125,000 units annually. ProFinish would charge $30 per unit. Shipping costs, estimated to be $7.50 per unit, would be SDL's responsibility. SDL has the right to reject any units that do not meet the agreed-upon quality specifications. Michelle has provided you with the per-unit costs for the current finishing process:

Direct materials $14.00

Direct labour 12.50

Variable MOH 6.00

Fixed MOH* 5.00

Quality inspection 1.50

* Fixed MOH includes building amortization, insurance, and property taxes.

There is one plant supervisor dedicated to overseeing the finishing process. His salary is $75,000, including benefits. The production manager, who earns $100,000 per year, spends approximately 20% of her time dealing with the finishing process. The equipment used in the finishing process has a total cost of $860,000 and is being amortized over eight years. If the finishing were outsourced, the machines could be sold to a used equipment dealer for $50,000. Prepare an analysis of the outsourcing proposal and make an overall recommendation, taking into account quantitative considerations. Assume that 137,500 units will be produced in a year.