Newport Circuits is trying to decide whether to shift production overseas of its relatively expensive integrated circuits (they average around $11 each). Offshore assembly would save about 11.1¢ per chip in labor costs. However, by producing offshore, it would take about five weeks to get the parts to customers, in contrast to one week with domestic manufacturing. Thus, offshore production would force Newport to carry another four weeks of inventory. In addition, offshore production would entail combined shipping and customs duty costs of 3.2¢. Suppose Newport's cost of funds is 15%. Will it save money by shifting production offshore?
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