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A BIG company operates a washing machine plant, which is trying to decide whether to outsource the production of its plastic agitator. The plant manager
A BIG company operates a washing machine plant, which is trying to decide whether to outsource the production of its plastic agitator. The plant manager received a bid of 67.00 per unit from a trusted supplier and compared it to internal production costs (see table 1). Table 1. Costs related to the internal production and outsourcing of the washing machine agitator Unit Cost Category Internal production Outsourcing Material (6.00 (5.00 Labor (2.00 C1.00 Tooling (1.00 (depreciation] (1.00 Notes: Annual unit volume is 1,000,000. Depreciation refers to straight-line depreciation of the (10,000,000 initial tooling cost, equal to (1,000,000 per year for 10 years ((1.00 = (1,000,000/1,000,000). Six years earlier, the plant had incurred (10 million in tooling costs to make molds for the agitators. Following the relevant accounting principles, they were charging themselves (1,000,000/year, over ten years, for the tooling cost. This is called straight-line depreciation. Since it had been six years since the tooling costs were incurred, there was still $4,000,000 worth of un-depreciated capital on the company's balance sheet. The accountants told the plant manager that if the agitator is outsourced, these assets will become worthless, and the manager will be forced to take a charge against the plant's profitability. The (4,000,000 charge would prevent the manager from reaching the performance goal. Put yourself in the role of Plant Manager and make your decision based on the above information. Explain your reasoning and the impact of your decision on the BIG company's profitability. Is there anything that the BIG companies' management could do to improve the incentive system for the Plant Manager? (Words limit: 400)
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