Question: Wagner Fabricating Company is reviewing the economic feasibility of manufacturing a part that it currently purchases from a supplier. Forecasted annual demand for the part is 3,200 units. Wagner’s financial analysis has established a cost of capital of 14% for the use of funds for investments within the company. In addition, over the past year $600,000 has been the average investment in the company’s inventory. Accounting information shows that a total of $24,000 was spent on taxes and insurance related to the company’s inventory. In addition, it has been estimated that $9,000 was lost due to inventory shrinkage, which included damaged goods as well as pilferage. A remaining $15,000 was spent on warehouse overhead, including utility expenses for heating and lighting.

An analysis of the purchasing operation shows that approximately 2 hours are required to process and coordinate an order for the part regardless of the quantity ordered. Purchasing salaries average $28 per hour, including employee benefits. In addition, a detailed analysis of 125 orders showed that $2,375 was spent on telephone, paper, and postage directly related to the ordering process.

Currently, the company has a contract to purchase the part from a supplier at a cost of $18 per unit. However, over the past few months, the company’s production capacity has been expanded. As a result, excess capacity is now available in certain production department and the company is considering the alternative of producing the parts itself. Forecasted utilization of equipment shows that production capacity will be available for the part being considered. The production capacity is available at the rate of 1,000 units per month, with up to 5 months of production time available. Production costs are expected to be $17 per part. A managerial concern is that setup costs will be significant. The total cost of labor and lost production time is estimated to be $50 per hour, and it will take a full 8-hour shift to set up the equipment for producing the part.

Make a recommendation as to whether the company should purchase (outsource) or manufacture the part. What is the saving associated with your recommendation relative to other alternative?

Price: $2.99

Solution: The downloadable solution consists of 4 pages
Deliverable: Word Document