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 $ 0.10 per part, given a fore-cast you provided of 200,000 parts in year 1; 300,000 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 $ 10,000. Direct materials can be purchased for $ 0.05 per unit. Direct labor is estimated at $ 0.03 per unit plus a 50 per-cent surcharge for benefits; indirect labor is estimated at $ 0.011 per unit plus 50 percent benefits. Up- front engineering and design costs will amount to $ 30,000. 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 15 percent per year.
What should you do, continue to produce in- house or accept the bid from your Taiwanese supplier?