A large global automobile manufacturer is considering outsourcing the manufactur

Question

A large global automobile manufacturer is considering outsourcing the manufacturing of a solenoid used in the transmission of its SUVs. The company estimates that annual fixed costs of manufacturing the part in-house, which include equipment, maintenance, and management, amounts to $7.8 million. The variable costs of labor and material are $8.25 per unit. The company has an offer from a major subcontractor to produce the part for $10.75 per unit. However, the subcontractor wants the company to share in the costs of the equipment. The automobile company estimates that the total cost would be $3.2 million, which also includes management oversight for the new supply contact. a. How many solenoids would the automobile company need per year to make the in-house option least costly? The company must consume more than 1840000 solenoids to make the manufacturing the part in-house option least costly. (Enter your response rounded to the nearest whole number.) b. What other factors, besides costs, should the automobile company consider before revising its supply chain for SUVs? What are the possible consequences of subcontracting the production of solenoids? (Mark all that apply.) A. Employment of new personnel into the company to produce solenoids. B. Potential layoffs of the employees occupied by the production of solenoids. c. Losing skills and knowledge and having a hard time starting manufacturing again. D. Gaining direct control over production. E. The ability of the subcontractor to deliver on time and with high quality should be considered F.Losing direct control over production. G. Obtaining skills and knowledge in the production of solenoids

Explanation / Answer

A: Number of solenoids required= Difference in fixed cost/ Difference in variable costs

= =(7800000-3200000)/(10.75-8.25)

= 1840000

B:B,C,E,F are the applicable options

A is incorrect since the subcontract will not entail recruitment of new personnel

B is correct since the employees earlier engaged in production will not be required

C is correct since the technology might change by the time the company wants to start manufacturing again.

D is incorrect since now the subcontractor will have control over production.

E is correct since the subcontractor may delay the supply.

F is correct since now the subcontractor will have control over production.

G is incorrect since the production process will shift away.

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