Case Module Acc 201

Behemoth Motors Corp. Make or Buy Decision

I would advise Mr. Wally Wizard to outsource with Far East Enterprises (FEE). It has been determined that the units manufactured by FEE will have the same quality assurance as Behemoth Motors Corporation (BMC) and FEE can also maintain the same delivery schedule. If we choose to outsource to FEE the cost for the purchase of direct materials will go away which is easy to do considering that the contract is on a month to month basis. This move along will save BMC $1,320,000. BMC will have to pay the employees union a penalty of $64,000 dollars a year for five years for laying off the 100 workers utilized in producing the GPSN’s at their facilities. Currently it cost BMC $1,344,000 dollars to pay theses employees to make 8,000 GPSN’s, if the company outsource and pay the penalty this will only cost BMC $320,000 dollars prorated into five years which is a savings of $1,024,000 dollars. The $5,600 dollars a month paid to each supervisor will not have any effect on the outcome because if BMC decides to outsource this product to FEE their jobs will be moved to other areas within the facility. BMC currently pays 4,000 per month for items stored at a storage facility. This cost will also be another savings that BMC will benefit if they where to outsource this product. General company overhead will be reassigned to other areas within the company if BMC decides to outsource this product. Bottom line with the cheaper cost per unit to make the same quality product and the additional savings that BMC will save by outsourcing the production of the GPSN’s I would recommend that we give Far East Enterprise the opportunity to support our company.

MBC production price: $425.00 per unit ($3,400,000 per 8000 GPSN’s)

Outsource price: $395.00 per unit ($3,160,000 per 8000 GPSN’s)

COST OF 8,000 GPNS UNITS per month

|ITEM |COST PER UNIT |Maintain product @ BMC |Outsource product to FEE...