Offshore production is a trend of assembly of a good in another country and then
ID: 1193366 • Letter: O
Question
Offshore production is a trend of assembly of a good in another country and then shipping it back to the US (or the primary sales market). Offshoring became popular in the late 1970s and was an issue in the recent presidential elections. You are a automobile factory manager considering this option for a new line of cars, which would add 100 workers somewhere (from 100 workers to 200 workers). You know that the daily wage rate of even non-unionized auto workers in the US is at least $75. In China you would expect to pay $50 per day. Assume that given infrastructure, transportation costs are the same between each factory and the retail location. Say you have the following data given from the assistant managers at different plants:
Worker productivity in China
If there are 100 workers then the plant makes 500 cars/ day
If there are 300 workers then the plant makes 750 cars/day
Worker productivity in the US
If there are 100 workers then the plant makes 600 cars/ day
If there are 200 workers then the plant makes 700 cars/day
Should you add the production line in China or in the U.S.? Discuss what changes in wages would make you reverse your decision.
Explanation / Answer
In order to detremine wether the production line should be set up in China or n the U.S. we need to calculate the Unit labour costs (ULC), which measure the average cost of labour per unit of output and are calculated as the ratio of total labour costs to real output.
1. China :
in case of 100 workers :
Total compensation for 100 workers = 100 *50 = $5000
Real Output = 500
Therefore, ULC = 5000/500 = $10
In case of 300 workers
Total Compensation for 300 workers = 300 * 50= $15000
Real Output = 750
Therefore, ULC = 15000/750 = $20
US,
In case of 100 workers,
ULC= 100 *75/600 = 7500/600 = $12.5
In case of 200 workers
ULC = 200 *75/700 = 15000/700 = $ 21.4
ULC in case of USA is much higher then that in china. Hence, company should add production line in China only. If the wage rate in China would have been above $ 75, it would have made sense to add production line in the US Market.
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