Question: From your calculations we can see that the sale of the VaVaVoom model will earn Supernormal profits. You, however, are trying to improve your reputation, and believe that you can further increase the profit level from the sale of the VaVaVoom model. Currently Renault produces the plastic handle mouldings used on the car door inhouse. You believe that by using the market to your advantage you can outsource this manufacture of plastic door handle mouldings and buy the mouldings at a lower price from an independent manufacturer.

(a) Can you explain in detail to your teammates the reason to buy outside the firm? Three specific reasons outlined in detail should be enough to state your case succinctly.

(b) One of your team has taken a module of economics in college and believes that he can show you up. He listens to your reasons but retorts with ‘But what about transactions costs involved’?

You rise to his challenge by explaining the term transactions costs in detail to him including their relationship to asset specificity and opportunism, however, you believe in this instance that contracting will suffice. Explain why.

(c) Another team member suggests that the precise engineering required for piston production should also be outsourced. You outline the problems associated with this, as opposed to the door handle mouldings.