Consider avoidable versus unavoidable costs Opportunity costs are often relevant Strategic issues may include: Quality of the purchased product Delivery responsiveness, technical capabilities, labour relations and financial stability of the supplier Ability of the supplier to respect confidential information 19-13 Week 11 - Session 1, 2012 Lecture example 3 Spa Company produces plunge pools. Currently, the company uses internally manufactured pumps to power jets. Spa Co. has found that 40 % of the pumps have failed within their 12-month warranty period, causing huge warranty costs. Because of the company's inability to manufacture high-quality pumps, management is considering buying pumps from a reputable outside supplier who will also bear any related warranty costs. Spa Company's unit cost of manufacturing pumps is $83.75 per unit, including $17.25 of allocated fixed overhead. Also, the company has spent an average of $22 repairing each pump returned. Spa Company can purchase pumps for $92.50 per pump. During 2011, Spa Co. plans to sell 12 800 plunge pools (each pool requires one pump).
a. Determine whether Spa Company should make or buy the pumps, and the amount of cost savings arising from the best alternative.
b. What qualitative factors should be considered in the outsourcing decision?