Reconsider the Skycell data in Exercise 1. Assume that the plant has 1,250 employees and a no-layoff policy. Overtime is limited to 20 hours per employee per month. A third party has offered to produce cell phones as needed at a cost of €26 per unit (this includes component costs of €20 per unit).
a. What is the average per unit of in-house production (including inventory holding and overtime cost) if the third party is not used?
b. How should Skycell use the third party? How does your answer change if the third party offers a price of €25 per unit?
c. Should Skycell use the third party if the per unit cost is €28?
d. Why would Skycell use the third party even when the per-unit cost of the third party is higher than the average per-unit cost (including inventory holding and overtime) for in-house production?

Data From Exercise 1

Skycell, a major European cell phone manufacturer, is making production plans for the coming year. Skycell has worked with its customers (the service providers) to come up with forecasts of monthly requirements (in thousands of phones) as shown in Table 8-10.

Table 8-10

Manufacturing is primarily an assembly operation, and capacity is governed by the number of people on the production line. The plant operates for 20 days a month, eight hours each day. One person can assemble a phone every 10 minutes. Workers are paid €20 per hour and a 50 percent premium for overtime. The plant currently employs 1,250 workers. Component costs for each cell phone total €20. Given the rapid decline in component and finished product prices, carrying inventory from one month to the next incurs a cost of €3 per phone per month. Skycell currently has a no-layoff policy in place. Overtime is limited to a maximum of 20 hours per month per employee. Assume that Skycell has a starting inventory of 50,000 units and wants to end the year with the same level of inventory.

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Jan. 1,000 Feb. 1,100 March 1,000 April 1,200 May 1,500 Jun 1,600 July 1,600 August 900 Sept. 1,100 Oct. 800 Nov. 1,400 Dec. 1,700