HydroPure manufactures several models of water purifiers in its company-owned factory in the state of Tennessee in the United States. Due to plant capacity limitations, the company considers outsourcing the production of one of its top selling models to China. The product’s wholesale price is \($70\) with a variable manufacturing cost of \($40\) per unit. The weekly demand for this model at the company’s central distribution center in Tennessee is normally distributed with mean 300 and standard deviation 100. Currently, the warehouse places inventory replenishment orders on a weekly basis and it takes one week for the orders to be delivered. HydroPure has found a potential subcontractor in China from which it can source the product for \($30\) per unit (including transportation costs); however, a minimum order quantity of 600 units will be required. Also, if the production is outsourced to the Chinese manufacturer, the lead time for order replenishments will be normally distributed with mean six weeks and standard deviation two weeks.

a. What will be the impact on HydroPure’s financial statements if the firm finally decides to offshore its production? Assume that HydroPure can finance any increase in current assets by using a credit line bearing 10 percent interest rate.

b. Please outline the major risks (not addressed in the problem description) associated with the firm’s decision to outsource its production to China. Which of the financial statements might be affected by these risks?