#7 first picture is the question.

ask if you need additonal information

the potential effect of 10, 25, or 50 percent tariffs on a major Chinese exporter? 7. (LO 9-6) Why will a make-or-buy decision help a company determine its core competencies? 478 Chapter 9 Perform the Analysis Prescript Assume the Arkansas General Assembly is deduction in the corporate income tax rate from 8 percent to either 6 percent econ. At the same time, a company might have a potential 5 percent increase in care might stay neutral (table income remains the same), or might have a potential percent decrease in taxable income Exhibit 9.18 details the taxable income under cach of the income scenarios and the taxes owed under cach potential tax rate. Tele If Tax Rates Taxes Owed SI Tax Rate Times Owed S. If Rate Tues SO Income Scenarios EXHIBIT 9.18 Taxable income and se wed Based on Average Earnings before Tax 52.000.000 S. $130.000 incesty Income man them I $12.00 5314,000 5. Exhibit 9.18 shows the range of taxes owed for tax burden) based on cach of the poten tial in scenarios (Note the three possible tax rates and three possible tache income cenario gives us nine potential scenarios). This scenario analysis will help a company understand how changes in the tax rate affect taxes owed under different scenos Exhibit 9.19 estimates the change in tax burden under different income tax proposals compared to the base 5160,000 tax ($2.000.000 table income x 85). Negative spresentax savings ECHIBIT 9.19 The Ch T Income IT Rates Theo Tasse The Beacher cells actually och po 100 percent is well u 30 479 of the escenarios determines the expected of each of the Wely impact of a Note the amount of expected tax change in Exhibit 9.19 is multiplied by the Wes in the same cell of Exhibit 9-20 oct the expected value of each of these Exhibit 9.21. So, in the scenario where the tax rate stays at percent and income inses by 5 percent cares would increase by 58.000 (frons Exhibit 9.191. There is a 00probability of this happening (from Exhibit 9.20 Multiply by 0.05 to get the et value of $400 (as shown in Exhibit 921). In this case, the total expected value of the proposed change is a tax savings of $41,700, which is the sum of the individual ed values (as shown in the bottom right cell of Exhibit 9.21). Table Income 52.000000 Tax Rate o Ta Ral 4 Th Rae 5-100 50 11. Sumo Expected in 5614 EXHIBIT 9.21 Expected Value of Each of the Scenarios Negative values represent tax saving $2.000.000 SERO 5(12.000 30.000 | | | | | SINO 100 S. 567.300 das by 39 500 5611.700 ST100 5441,700 peting The usefulness of the watif analysis is that decision makers can see the possible impact of changes in tax rates across multiple scenarios. This model relies heavily on assumptions that drive each scenario, such as the initial camings before tax, the expected change in earnings, and the possible tax rates. Data Analytics help confirm or tetine the details quid ing the scenarios, so the decision maker doesn't have to rely on as many assumptions. This analyzed data informs the assumptions of the model to more accurately estimate expected values. In this example, the analysis of before-tax income and other external factors can help determine more morate probability estimates. Likewise, an analysis of the legisla tive proceedings may help determine the likelihood of a change LAB CONNECTION An example of scenario analysis is the subject of Lab 9-9. Make or Buy: Making Outsourcing Decisions Many experts believe a company should outsource any process or function that is not part of its core competency (what it is best at or where it competes in the market). For example, while Apple is an expert at designing iPhones, it leaves the manufacturing of the smartphones to companies like FoxConn. Many companies have outsourced specialized services (like marketing, payroll, or legal work) or manufacturing to be able to focus on But how do managers make such outsourcing decisions? The essence of the decision show best to use the company's available resources. Should Apple produce its iPhones or outsource it to FoxConn? We'll perform a make-or-buy analysis, a technique used to what their company does best. analyze and address the question whether to manufacture a product in house or to purchase it (or outsource it extemally). Assume the variable cost for Apple to make the latest version of the iPhone is $500 phone: the price (the full absorption cost that includes all fixed and variable costs is 5700 phone. ForCoun is willing to produce the iPhones for 5600/phone. While it would be nice if we could make our decision solely based on that cost per unit information, there are some other aspects that must be considered as well To help make the decision, Apple could consider the following: 1. How does the variable cost per unit compare to the price offered by the outsourcer? While the variable cost ( Siphone) saved is less than the cost to outsource the product (5600/phone). Apple must do a deeper evaluation of its full cost 2. If we are able to make a longer-term decision to outsource, can we ultimately get rid of some of our fixed costs? What happened with past outsourcing decisions at our com pany with respect to fixed costs? Some fixed costs (factories, supervisor salaries, etc.) might take years to eliminate, but other fixed costs (rent, utilities, etc.) might be possible to eliminate in the short term. 3. If Apple doesn't manufacture its own products, does it have other promising projects to pursue with its freed capacity, preferably projects that are consistent with Apple's core competency? This is an important analysis of available capacity and other positive NPV projects that are available for the company to pursue. 4. Should Apple engage multiple companies as outsourcing partners rather than just one (FoxConn)? What happens if Foxconn faces financial or political issues such as accusation of the use of child laborers or poor working conditions? What would happen to Apple iPhones! Are there other contract manufacturers available to do the same high-quality work required by Apple! How can prescriptive data analysis help with this make-or-buy decision? Scenario analysis, sensitivity analysis, and financial modeling are all good examples of prescriptive analytics that can be applied Sensitivity Analysis What sensitivity analysis could we do, looking at various levels of reducing the company fixed costs by 25, 50, or 75 percent? For example, based on past experience, what fixed costs can be discontinued in the short or long term if we outsource all iPhone production to FoxConn? Scenario Analysis and Financial Modeling If Apple outsources all iPhone manufacturing to FoxConn or other contract manufactu ers, would that capacity now allow Apple to develop more wearable technology (like eye implants or clothing/accessories) or additional content for its Apple Music offering or Apple TV streaming capability? Under each potential scenario, a financial model is pro duced to assess the level of increased profits/margins that could be achieved if Apple able to develop new products or is able to reduce its fixed and variable costs. PROGRESS CHECK 9. Let's suppose General Motors wants to buy engines from Toyota Instead of med ing them for itself. What would General Motors consider when evaluating this option besides just fixed and variable costs