Question:

Study the Maine-Barnes Ltd. Case attached. Discuss the following factors in relation to the make-buy decision in this case:

1) Capacity considerations,

2) manufacturing jobs and work-force stability for Maine-Barnes,

3) design secrecy,

4) control of quality,

5) control of delivery performance,

6) management control of costs, and

7) the cost of make vs. buy.

Maine-Barnes was a successful small firm that had carved out a profitable niche in the electronic

office products field. A proposed new line of sophisticated professional calculators currently

posed some manufacturing problems for the firm because of limited shop capacity. Josh Purdy,

the firms supply management director, was asked to investigate the possibility of subcontracting

one of the components to an outside sourceand then to prepare a make-or-buy recommendation

for the general manager.

Maine-Barnes was located near Boston in the heart of a high-tech manufacturing

community. The firms success was due primarily to its ability to produce high-quality specialty

products designed for particular professional uses by engineers, architects, medical researchers,

financial analysts, and so on. Product technology in the field was undergoing continual change.

As a result, product prices had dropped markedly during the past two years, and competition in

the market was keen and fast paced.

The proposed line of new calculators was designed to be highly price competitive.

Consequently, a permanent rechargeable battery powered the units. This meant that each unit was

sold with a small plug-in recharging unit. Although the recharger increased the initial cost of the

unit somewhat, the user realized significant operating cost savings during the life of the product.

In addition to an attractive life cycle cost, Maine-Barnes was banking on several unique

proprietary design features of the calculator and the recharging unit to generate a high demand for

the new product line. Unfortunately, the new design features were not patentable.

Despite the general managers optimistic views for the new product line, the marketing

manager was unable to forecast demand for the new units with what he considered to be a

comfortable level of accuracy. Because of competition and rapidly changing technology in the

industry, he was not willing to forecast first-year sales of more than 50,000 units. If the line was

well received, he estimated that approximately 100,000 units could be sold in each of the two

succeeding years.

Maine-Barnes had grown steadily during the past five years and was now operating near

its manufacturing capacity. The shop manager cautioned that addition of the new calculator line

would stretch the operation to its limit. In fact, further analysis revealed that the shop could

handle no more than 75,000 new calculator units per yearand this was without producing the

companion recharger units. If Maine-Barnes were to produce the recharger units too, it would

have to invest approximately $84,000 in new equipment. The life of the equipment would be

approximately twelve years. For tax purposes, however, the Internal Revenue Service would

permit it to be depreciated over a seven-year period.

As a result of the preceding analysis, Josh Purdy requested bids from three former

suppliers for the new recharger unit. All three were known to be competent and reliable; their

bids are summarized below.

BIDS ON THE RECHARGER UNIT

($ per unit)

Purchase qty. Eastern Mfg. Boston Electrical D & A Mfg.

50,000 $8.15 $7.45 $7.82

75,000 7.68 7.12 7.45

100,000 7.06 6.79 7.10

In response to Joshs inquiry, all three firms indicated an interest in discussing the possibility of a

three-year, single-source contract. All were willing to discuss bid prices further if a three-year

deal could be worked out.

After reviewing the bid figures, Josh discussed the possibility of making the recharger inhouse

with the shop manager and the firms chief cost accountant. Several days later, Josh

received the following estimated cost data from the controllers office.

In-house unit costs to make the recharger

Direct labor $1.50

Materials 3.00

Factory overhead (110% direct labor) 1.65

Factory cost 6.15

General administrative and selling

expense (10% factory cost) .62

$6.77 per unit

Notes:

1. Materials cost includes a 20 percent internal material handing cost.

2. Factory overhead is estimated to be 35 percent variable and 65 percent fixed.

After studying the cost estimate, Josh was not certain that it was complete. For example, he

wondered why an allowance of 15 percent had been made for scrap material but none for labor.

He was also puzzled about the overhead figures. The controller indicated that there would be no

reduction in overhead if the new equipment was purchasedand that the amortization of the new

equipment would constitute an additional expense.

Josh was also aware that the firms labor contract expired in several months. In the past,

subcontracting work to outside suppliers had always been a sensitive issue with the union,

although wage rates seemed to be particularly important this year.