3.) (20 points) 3M manufactures face masks at it's Maplewood, MN facility. The companies' facility has historically produced N-95 facemasks with a variable manufacturing cost of $7.00/unit. However due to increased Food and Drug Administration (FDA) regulations, quality management & testing processes must be performed. The additional processes (including supervision) are known to be FIXED at $800,000/yr. The historic variable manufacturing cost of $7.00 unit would continue to be valid with the new processes.

3M has recieved quotes from 2 suppliers.

One supplier located in China has quoted a price for the mask 48 (Chinese Yuan, CNY). The exchange rate is 7.08CNY = 1USD.

The second supplier is located in India and can produce the mask for 515 (Indian Rupee, INR). The exchange rate is 76.82INR = 1USD

Annual sales of the N-95 facemask are expected to be 35,000,000 units. The expected retail price is expected to be $32/unit regaurdless of where it is made. Variable sales, marketing and distribution costs are expected to be $0.25/unit, and fixed costs for these same functions is $330,000/yr., regaurdless of where the masks are manufactured.

a.) Which of the 3 options (continue manufacture in Minnesota w/additional fixed cost required by FDA, outsource to China, outsource to India) results in the cheapest total manufacturing cost?

b.) Optional Bonus question (10 points), what exchange rates for the CNY and INR would drive cost parity with domestic manufacture (i.e, what would the exchange rates need to be for the decision to be neutral?) . Assume that the quoted price quoted by the suppliers in their currencies is the same (exchange rate is the only variable).

1. Optional Bonus question (10 points). Both currencies are expected to exchange in the range they have for the last 6 months (Nov 2019- April 2020) for the duration of the outsourcing agreements (if executed). If the exchange rate used for the purchase contracts is based on the weekly closing exchange rate, do either of the currencies present risk to the decision made in question a.)?