One of your Taiwanese suppliers has bid on a new line of molded plastic parts that are currently being assembled at your plant. The supplier has bid \(0.10 per part, given a forecast you provided of 200,000 parts in year 1; 300,000 in year 2; and 500,000 in year 3. Shipping and handling of parts from the supplier’s factory are estimated at \)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 can continue producing the part, the plant would need to invest in another molding machine, which would cost \(10,000. Direct materials can be purchased for \)0.05 per unit. Direct labor is estimated at \(0.03 per unit plus a 50 percent surcharge for benefits; indirect labor is estimated at \)0.011 per unit plus 50 percent benefits. Up-front engineering and design costs will amount to $30,000. 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 15 percent per year. What should you do, continue to produce in-house, or accept the bid from your Taiwanese supplier?
