You are the production manager for Porter Cable (a power tool company) based in

Question

You are the production manager for Porter Cable (a power tool company) based in Philadelphia, PA and you need to decide whether to buy the motor for the power tools or to produce it in house. You can order the motor from manufacturers in China, Panama, Germany and Dallas, TX. The cost for in-house production is $22 per motor. What is the maximum price per unit from the manufacturers in each country that would make you indifferent to purchasing it or making it in-house?

Remember: Time is money!

Important elements of the problem

•

You are purchasing 100,000 motors at the beginning of the year, for the full year

•Each 20’ST 1mt container holds 10,000 motors

•The shipping and the total cost of the motors must be paid by Porter Cable when the shipment leaves the manufacturer’s country or leaves the US manufacturer’s city

•To pay for the shipping and total cost of the motors, Porter Cable will need to take money out of an investment that pays 8% APR compounded daily

The link:

https://www.searates.com/reference/portdistance is a good source of information for shipping times and costs between different countries

Steps to use the webpage:

1.Select country of origin (Germany, Panama, China) or US city (Dallas)

2.Select destination city (in this case Philadelphia)

3.From the list icon, select “Electrical Equipment & Supplies”, then select “Other Electrical Equipment”

4.Suppose each container is a full container and remember your container and shipping specifications to determine total number of containers

5. To view the total cost of shipping select “Origin Charges”, “Ocean Rate (FIFO)” and “Destination Charges”. Finally, click on the “Details” button and specify number of containers.

NOTE: choose the lower range value for your calculations.

Explanation / Answer

Purchasing the motor will cost more, and each unit of motor produced will help in getting the motor at a lower cost.

The purchasing would not only increase the per unit cost of each motor but at the same time it would also require to liquidation of the investment which is giving 8% APR compounded daily.

So, the in house production of the motor would be profitable.

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