Question
A typical US furniture manufacturer sells 11,560 sofas annually. It spends $175 on raw materials per sofa and sells sofas to furniture stores at an
A typical US furniture manufacturer sells 11,560 sofas annually. It spends $175 on raw materials per sofa and sells sofas to furniture stores at an average wholesale price of $650. This company is considering outsourcing the sofas to a Chinese manufacturer. If the company decides to outsource, it will purchase the sofas at an average price of $289 FOB. Approximately 3% of the sofas manufactured in the USA are damaged in transit while, 4% of the sofas made in China are damaged in transit. 98% of customers backorder a damaged sofa. The re-handling fees for damaged sofas are $250 each. It would be able to sell its production equipment for $1.2 million and get rid of its factory for $1.6 million; as well as the overhead and expenses associate with the factory.
Outsourcing eliminates direct labor cost. Outsourcing will also add $27,500 of other income as the result of investing some of the money from the sale of plant equipment and real estate; however, the bulk of the funds ($2,193,000) would go to stock (equity) buy-back; as well as, decreasing indirect labor and other operating cost by $1,805,000 and $748,500 respectfully. However, outsourcing increases cost of goods sold from $2,023,000 to $3,347,000; along with increasing transportation cost by $3,118,000. Concerning the balance sheet, outsourcing Increases current Liabilities by $871,000, decreases long term liabilities by $400,000, increases inventory by $528,000—this is mainly due to transit and more safety stock, increases cash by $550,000, and decreases fixed assets by $2,800,000. The interest rate is 5%, the tax rate is 33%, and the inventory carrying rate is 25%.
income Statement of Manufacturing in the USA | ||||
Sales | $9,800,000 | |||
Cost of goods sold | $2,023,000 | |||
Gross Margin | $7,777,000 | |||
Transportation | $550,000 | |||
Warehousing | $225,000 | |||
inventory carrying cost | $57,000 | |||
Direct Labor | $1,709,000 | |||
Indirect Labor | $2,835,000 | |||
Other operating cost | $1,036,000 | |||
Total Operating Cost | $6,412,000 | |||
EBIT | $1,365,000 | |||
Interest | $43,950 | |||
Taxes | $435,947 | |||
Net income | $885,104 |
Balance Sheet | ||||||
Assets | Liabilities | |||||
Cash | $50,000 | Current liabilities | $279,000 | |||
Account receivables | $817,000 | Long-term debt | $600,000 | |||
Inventory | $228,000 | Total liabilities | $879,000 | |||
Total current assets | $1,095,000 | Liabilities & Equity | ||||
Net fixed assets | $3,050,000 | Stockholder equity | $3,266,000 | |||
Total assets | $4,145,000 | Total liabilities & equity | $4,145,000 |
From the information above, determine
(1) the labor cost to build a sofa in each USA and China
(2) the labor cost difference between building a sofa in the USA and China;
(3) using an average of 12 sofas per shipping container, calculate the average cost of shipping a sofa.
(4) Assuming all other cost are equal, determine if the lower labor costs outweigh the shipping cost.
(5) Construct an income statement and balance sheet for outsourcing to China,
(6) calculate all necessary financial ratios to assess whether the firm should keep manufacturing in the USA or outsource to China.
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Usa MANU FACTURER sells Il5G0 Sofas Annually Spending s178 per sofa Hence Aunccal Cost 11560X175 For ...Get Instant Access to Expert-Tailored Solutions
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