Penny Farthing, a leading manufacture of full metal and coil wire zippers, has been promoting a new line of full metal stainless steel zippers for high-performance outerwear. No other manufacturer has a stainless-steel zipper, most full metal zippers are made from brass or aluminum. Stainless steel does not rust and is extremely durable and tough. Unlike most zippers that are made of wire or plastic, the teeth of full metal zippers are individual pieces of metal molded into shape and set on the zipper tape at regular intervals. Only a few companies in the world have the technology to manufacture full metal zippers. These types of pre-formed metal zippers are mainly used in high grade jeans-wear, workwear, etc., where high strength and durability are required.

Bill Johnston the manager of supply chain and logistics at Penny Farthing has to make a recommendation to Peggy Prispotty, the vice president of operations. Ms. Prispotty wishes to know where they should set-up their new plant. Should they take their manufacturing process offshore where there will be lower plant overhead and equipment costs or locate manufacturing in the USA.

Currently Penny Farthing has a demand of 200,000 full metal stainless steel zippers and expect demand to increase 10% per year for the next 5-years, but are uncertain of where demand will be going after that. Bill has collected the following information concerning the cost of the two different processes at an output of 200,000 units.

		Off-Shore		Localization
Plant Overhead & Equipment[1]		$620,000.00		$650,000.00
Plant Operations & Labor1		240,500.00		300,000.00
Total Transportation Cost		104,000.00		46,000.00
Inventory Costs
Carrying		50,000.00		36,000.00
Handling		33,000.00		24,000.00
Ordering		16,000.00		16,000.00
Total Cost		$1,063,500.00		$1,072,000.00

1. At what level of demand (number of units) per year would these two alternatives be equal?
2. Graphically represent these two alternatives and their tradeoff point
3. Which alternative would you recommend be in place (a) for the short term, (b) to accommodate future demand growth over the next five years?
4. If you were Bill, which alternatives would you advise Peggy to implement? What criteria would you use to arrive at your decision?

Answer rating: 100% (QA)

After finding the per unit variable costs in order to determine the demand at which the costs for bo... View the full answer