Kyota, a major automobile manufacturer located in San

Kyota, a major automobile manufacturer located in San Antonio, Texas, makes cars, SUVs, and light Trucks. For the past 15 years, Kyota has been known for producing quality vehicles and producing most components (tires, radios, interiors, engines, etc) in-house.  

Last year, Kyota began offering global positioning systems (GPS) in all vehicles. Automobiles with GPS devices were sold for $1,000 more than vehicles without.  During the year 15,000 GPS devices were made internally by the satellite technology division of Kyota (15,000 units is the maximum GPS device that can be produced in 1 year). The unit costs of the GPS are as follows:

Direct materials                     $110

Direct labor                            $200

Variable OH                           $ 10

Allocated fixed OH                $   5

Variable marketing                 $   0.50

Fixed marketing                     $   0.50

Recently, Kyota has been faced with tight profit margins and intense competition (many of their competitors have begun offering "employee discounts" to all customers!!). Sany, an electronics manufacturer has approached Kyota and offered to manufacture all of the GPS devices for $315 dollars per unit plus shipping charges of $200 per thousand units.  

If Kyota accepts the offer it will have no alternative use for the satellite technology department, therefore, the department will be closed.

The GPS production supervisor (who is a direct descendant of the company founder and whose salary makes up 5% of direct labor costs) will be transferred to a Kyota warehouse where he watches TV all day and does not replace any other employees. All other employees will be laid off.

Variable overhead costs will be eliminated.

In addition, variable marketing costs will be eliminated.

Fixed marketing costs, however, will be reduced by 50%.

Allocated fixed overhead costs cannot be eliminated if production is outsourced


Part A. Should Kyota accept the offer from Sany to produce all GPS devices (support your answer with an analysis of each option)?

Part B. Given the assumptions in Part A, what is the highest price that Kyota would be willing to pay Sany to produce each GPS device?


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