Managing Supply Chain and Operations 1st Edition by Thomas Foster ,Scott Sampson,Cynthia Wallin,Scott Webb

Exercise 13

A company currently produces an electric motor at its main manufacturing facility in Dayton, Ohio. The motors cost when produced at the Dayton plant is $125 per motor. The company is currently considering outsourcing production to either a plant in Mexico or a plant in Indonesia. The company believes that producing the motor in Mexico will result in additional overhead of 10 percent of the motors cost to produce it in Dayton. Furthermore, for motors produced in Mexico, the need for additional inventory will probably add $0.50 to each motors cost, and lower quality will probably cost approximately $1.00. Shipping from Mexico will increase cost by $3.75 per motor. The cost of the motor produced in Mexico will be S106.25. If the motor is produced in Indonesia, it will cost $98.00. The company estimates that the shipping cost from Indonesia will be $7.00 per motor, and the costs of additional inventory and lower quality are estimated at $2.00 and $1.25, respectively. The additional overhead is estimated to be 15 percent of the motor's production cost in Dayton. Conduct a total cost of outsourcing for this item.