One of your Taiwanese suppliers has bid on a new line of molded plastic parts th
ID: 2747626 • Letter: O
Question
One of your Taiwanese suppliers has bid on a new line of molded plastic parts that is currently being assembled at your plant. The supplier has bid $0.09 per part, given a forecasted demand of 240,000 parts in year 1; 330,000 in year 2; and 500,000 in year 3. Shipping and handling of parts from the supplier’s factory is estimated at $0.01 per unit. Additional inventory handling charges should amount to $0.005 per unit. Finally, administrative costs are estimated at $20 per month. Although your plant is able to continue producing the part, the plant would need to invest in another molding machine, which would cost $12,000. Direct materials can be purchased for $0.08 per unit. Direct labor is estimated at $0.03 per unit plus a 50 percent surcharge for benefits; indirect labor is estimated at $0.012 per unit plus 50 percent benefits. Up-front engineering and design costs will amount to $29,000. Finally, management has insisted that overhead be allocated if the parts are made in-house at a rate of 100 percent of direct labor cost. The firm uses a cost of capital of 16 percent per year.
(a) Calculate the NPV. (Round your answer to the nearest dollar amount. Negative amount should be indicated by a minus sign.Omit the "$" sign in your response.) NPV $
(b) Should you continue to produce in-house or accept the bid from your Taiwanese supplier?
Explanation / Answer
Cost per Unit - In House Purchase from Supplier Material Cost $ 0.080 Shipping and Handling Cost $ 0.010 Direct Labor $ 0.030 Additional Inventory Charge $ 0.005 Direct Labor Surcharge $ 0.015 Supplier Cost $ 0.090 Indirect Labor $ 0.012 Indirect Labor Surcharge $ 0.006 $ 0.143 $ 0.105 In House Year 0 1 2 3 Forecast Demand (a) 240000 330000 500000 Per Unit Cost - (b = 0.143*a) $ 34,320.00 $ 47,190.00 $ 71,500.00 PV Factor at 14% ( c) 0.87719 0.76947 0.67497 PV at 14% (d = b*c) $ 30,105.26 $ 36,311.17 $ 48,260.46 Machine Cost ( e) $ 12,000.00 Design Cost (f) $ 29,000.00 Total Cost (d+e+f) $ 41,000.00 $ 30,105.26 $ 36,311.17 $ 48,260.46 NPV of Cost $ 155,676.90 Supplier Year 0 1 2 3 Part Cost (a = Demand * 0.105) $ 25,200.00 $ 34,650.00 $ 52,500.00 Admin Cost (b) $ 240.00 $ 240.00 $ 240.00 Total Cost (c = a+b) $ 25,440.00 $ 34,890.00 $ 52,740.00 PV Factor at 14% (d) 0.87719 0.76947 0.67497 PV at 14% (e = c*d) $ 22,315.79 $ 26,846.72 $ 35,598.00 NPV of Cost $ 84,760.51 Bid from Taiwanese Supplier should be accepted as NPV is lower in that scenario
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