One of your Taiwanese suppliers has bid on a new line of molded plastic parts th
ID: 2471382 • Letter: O
Question
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 $0.09 per part, given a forecasted demand of 240,000 parts in year 1; 330,000 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 $0.005 per unit. Finally, administrative costs are estimated at $20 per month. Although your plant is able to continue producing the part, the plant would need to invest in another molding machine, which would cost $12,000. Direct materials can be purchased for $0.08 per unit. Direct labor is estimated at $0.03 per unit plus a 50 percent surcharge for benefits; indirect labor is estimated at $0.012 per unit plus 50 percent benefits. Up-front engineering and design costs will amount to $29,000. Finally, management has insisted that overhead be allocated if the parts are made in-house at a rate of 100 percent of direct labor cost. The firm uses a cost of capital of 16 percent per year.
(a) Calculate the NPV. (Round your answer to the nearest dollar amount. Negative amount should be indicated by a minus sign.Omit the "$" sign in your response.)
(b) Should you continue to produce in-house or accept the bid from your Taiwanese supplier?
(b) Should you continue to produce in-house or accept the bid from your Taiwanese supplier?
Explanation / Answer
(a)
Calculation of PV for assembling in house:
NPV if the bid of the supplier is taken
= PV of outflow of assembling - PV of outflow of purchase from supplier
= $151478 - $81658 = $69820
(b) As the NPV of the pirchase from supplier is positive, the proposal of the Taiwanese supplier should be taken.
Price per part $ 0.09 shipping cost $ 0.01 Inventory handling charge $ 0.01 Total cost of purchase $ 0.11Related Questions
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