Relevant Information For Decision Making Assignment Overview

Relevant Information For Decision Makingassignment Overview

Make a recommendation to Wally Wizard in a 3- to 4-page paper. Be sure to support your recommendation with the decision-making process outlined in the background information.

Paper For Above instruction

Introduction

The decision to outsource the manufacturing of GPS navigation units (GPSN) for Behemoth Motors Corp. (BMC) presents a strategic choice that involves analyzing costs, efficiencies, and implications for the company's internal operations. The core of this decision hinges on evaluating whether outsourcing to Far East Enterprises (FEE) offers a cost-effective alternative compared to current in-house production, considering both immediate financial impacts and longer-term operational considerations.

Cost Analysis of In-House Production

Currently, BMC produces 8,000 GPSN units monthly with a total manufacturing cost of $425 per unit. These costs encompass direct materials, direct labor, factory floor space charges, supervisory labor, and general overhead. Specifically, the unit costs break down as follows: $165 for direct materials, $168 for direct labor, $5 for factory space, $7 for supervisory labor, and $80 for overhead. This results in a total of $425 per unit. During production, the units experience a 2% failure rate, indicating high quality control standards, and 98% of units are installed in SUVs, which signifies strong product integration with BMC’s existing manufacturing line.

Outsourcing Proposal and Cost Analysis

FEE proposes to manufacture and supply 8,000 GPSN units at a fixed cost of $400 per unit, starting January 1, 2016. The contract would last for two years. The FEE offer could reduce per-unit costs by $25, but outsourcing involves several other factors that could influence overall costs and operational flexibility.

Additional costs associated with in-house production include penalties for laying off employees if manufacturing ceases, amounting to $66,000 annually for four years, and existing costs for factory space, supervisory staff, and overhead. If outsourced, BMC can reallocate supervisory staff and reduce factory space usage by half, possibly decreasing related costs. The possibility of reducing rented storage space by $5,000 per month also impacts the financial calculus. Importantly, the external manufacturing process claims to match the quality and delivery schedule of in-house production, mitigating risks associated with quality control or late deliveries.

Decision-Making Considerations

To make an informed decision, BMC should perform a comprehensive cost comparison that considers direct costs, indirect costs, and opportunity costs. The relevant costs include variable costs that can be avoided: direct materials (if purchased externally, assuming supplier costs are comparable or included in FEE’s bid), direct labor costs, factory space costs (which can be halved), supervisory charges (which can be eliminated), and the storage costs that could be reduced.

Conversely, sunk costs such as company overhead, which would remain unchanged regardless of the decision, should not influence the decision. Employee layoff penalties, however, are relevant, as they represent unavoidable costs if outsourcing occurs. The retained costs for laid-off workers and the penalty payments need to be incorporated into the analysis.

Strategic Implications and Risks

Beyond immediate costs, strategic considerations such as quality control, supply chain reliability, and impact on company image are essential. Outsourcing could reduce manufacturing flexibility and dependency on external suppliers, potentially affecting long-term strategic positioning. Conversely, FEE’s proven growth and quality standards suggest reliability, but risks associated with geopolitical factors, trade policies, or supplier stability must also be evaluated.

Financial Analysis

A detailed breakdown suggests that the variable costs of producing in-house are approximately $337 per unit, excluding allocated overhead, which is largely fixed. The direct costs attributable to outsourcing are lower at $400 per unit; however, the secondary costs, including employee penalties and potential savings from space and labor reallocation, could tilt the balance favorably toward outsourcing if calculated precisely.

Conclusion

Based on this analysis, outsourcing GPSN production to FEE appears financially advantageous primarily because of the lower unit cost of $400 compared to the effective marginal costs of in-house manufacturing, when considering relevant costs and potential savings. The ability to reallocate supervisory staff and reduce factory space and storage costs enhances this benefit. Nonetheless, BMC must consider strategic factors such as quality assurance, supply chain risks, and long-term contractual obligations.

Recommendation

Given the comparable quality, reliable delivery schedule, and potential cost savings—including space and labor reallocation—and considering the penalties for layoffs, outsourcing the GPSN units to FEE for the two-year term is recommended. This decision aligns with cost-efficiency principles and allows BMC to focus internal resources on core manufacturing activities while leveraging external expertise and lower-cost production options. However, BMC should establish strict quality control measures and contingency plans to mitigate potential supply chain disruptions from overseas manufacturing.

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