Relevant Information for Decision Making

Relevant Information for Decision Making

Introduction

The paper undertakes relevant information to assist Behemoth Motors Corp. (BMC) regarding their decision to outsource the Detroit BMC manufacturing unit. The paper provides recommendation based on the cost-benefit analysis of the available alternatives.



Discussion

Cost Evaluation of Internal Operations

For 2013, BMC has decided to install GPSN in its all SUVs. The forecasted figures show the requirement of 8,000 GPSNs per month. The case analysis indicates that BMC is currently incurring $425 per unit cost of manufacturing GSPN (table 1). Cost breakdown shows that the company is procuring material and labor from the local market.



Item

Cost Per Unit

Direct materials (purchased locally)

$165

Direct labor (6 hours @ $28 per hour)

168

Factory Floor Space Charges (16,000 sq. ft. at $2.50 per sq. ft. per month allocated over 8,000 units per month)

5

Supervisory labor (monthly cost of $56,000 allocated over 8,000 units per month)

7

General company overhead ($640,000 per month assigned to GPSN allocated over 8,000 units per month)

80

Total Unit Cost

$425

Table 1: Per Unit Cost of BMC Manufacturing Facility

The in-house manufacturing processes are efficient and well aligned with the international quality standards, which is evident from the fact that 98% of the manufactured units are instantly installed in the SUVs. The company is currently employing 100 direct labor and 10 supervisors to achieve per month manufacturing objectives.

Cost Evaluation of Outsourcing

Far East Enterprises, Ltd (FEE) has submitted a proposal to render manufacturing and delivery services for the Detroit BMC facility. The offer to outsource will meet BMC's forecasted per month requirement i.e. 8000 units of GPSN. However, the company has requested for a two year contract with the assurance of delivering same quality and same reliability of product at the cost of $400 per unit.

Cost Benefit Analysis

The cost benefit analysis of in-house manufacturing and outsourcing is based on various critical elements and cost control aspects of the decision.

 

BMC ($)

FFE ($)

Manufacturing Cost Per Unit

425 400

Production volume (monthly)

8,000 8,000

Total Manufacturing Cost

$ 3,400,000 $ 3,200,000

Table 2: Cost Comparison

As illustrated by table 2, outsourcing will enable BMC to reduce their total manufacturing cost per month from $3.4 million to $3.2 million. The decision to outsource will reduce the cost of business operations by 6%. It will allow the company to achieve flexible cost control mechanism that can save the business capital to be invested in other feasible business projects and working capital decisions.

Moreover, product outsourcing will save the cost in terms of additional hiring of supervisors for other business projects. The company can assign these supervisors to other in-house supervisory positions. The decision to outsource will allow the company to save a total cost of $ 1.44 million in the face of additional hiring requirement.

 

Saving Additional Cost of Hiring ($)

Number of supervisors 10 Cost per Supervisor 6,000 Total wages per Month $ 60,000 Annual Wage Cost $ 720,000 Wages Cost for Two Years $ 1,440,000

Table 3: Saved Cost of Hiring

Furthermore, product outsourcing will benefit the company in terms of storage ...