Riverside Clippers Corp manufactures garden tools in a factory in Taneytown, Maryland. Recently, the company designed a collection of tools for professional use rather than consumer use. Management needs to make a good decision about whether to produce this line in their existing space in Maryland, where space is available or to accept an offer from a manufacturer in Taiwan.

Data concerning the decision are:

Expected annual sales of tools (in units)............................................................800,000

Average selling price of tools..............................................................................$12

Price quoted by Taiwanese company, in New Taiwanese Dollars (NTD) .........................175

Current exchange rate...........................................................................35NTD = 1$

Variable manufacturing costs..................................................................$4.75 per unit

Incremental annual fixed manufacturing costs associated with the new product line.....$400,000

Variable selling and distribution costsa..........................................................$1 per unit

Annual fixed selling and distribution costsa....................................................$220,000

aSelling and distribution costs are the same regardless of whether the tools are manufactured in Maryland or imported.

Required

1. Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or purchase them from the supplier in Taiwan? Explain.

2. Riverside Clippers Corp believes that the U.S. dollar may weaken in the coming months against the New Taiwanese Dollar and does not want to face any currency risk. Assume that Riverside Clippers Corp can enter into a forward contract today to purchase 175 NTD for $5.35. Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or purchase them from the Taiwan supplier? Explain.

3. What are some of the qualitative factors that Riverside Clippers Corp should consider when deciding whether to outsource the garden tools manufacturing to Taiwan?