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 rehandling 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 $528,000this 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%.

ncome 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; and, (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, and (6) calculate all necessary financial ratios to assess whether the firm should keep manufacturing in the USA or outsource to China.