Add learning points to this case. Please list the pros and cons of each of the 3 alternative courses of action and explain briefly.

Fibertec is a Belgium-based company that manufactures and processes a variety of natural products and uses highly advanced material processing technologies.

Fibertec has had a branch in Spain from the beginning. It has six (6) product departments that function as a profit center supplying products globally. Fibertec's large customers are industrial companies whose main business is special storage containers and home and industrial textiles, among many others.

Fibertec in Spain is being managed by Mr. Jorge Ruiz, the General Director of the Company. He is ably assisted by highly experienced officers who have been with the company for over 20 years.

PTC's Product Department manufactured one of the company's leading products: PTC. However, due to strong competition in the market, PTC was unable to generate a good margin.

The company received an offer from Engineering Tools to manufacture and adopt the 4,000 units of PTC for €975,000 per year that will increase proportionally to the level of demand.

The CEO then called the company's accountant to provide him with the breakdown cost of PTC's product department to find out the cost to produce PTC and compare it to Engineering Tools' offer. How, then, the CEO will decide in this decision to make or buy is the object of analysis of this work.

Problem Statement

Will the company outsource the Engineering Tools PTC to minimize manufacturing costs?

Mission statement

Using the facts of the case, the analysis aims to better understand the following objectives:

Determine relevant costs that can help Fibertech make the best decision

Identify the advantages and disadvantages of make or buy options

point of view

The analysis of the case will take the point of view of Mr. Jorge Ruiz, General Director of Fibertec.

Areas of Consideration/Analysis of Facts

Constraints for Decision Making

The complexity of Fibertech products requires collaboration between engineering teams

Skill of employees in PTC manufacturing and their qualified services to other departments

PTC quality offered by Engineering Tools

Inventory of LT4 materials for four years

Cost of acquisition and updating of machinery

Future of PTC product department employees, most of them have been with the company for more than 20 years.

Relevant Costs for Decision Making

David Barrios, head of the accounting department produces a breakdown of the cost of the PTC Product Department as follows:

exhibit 1

PTC Product Department Cost

Detailed report	Amount	cost relevance	Observations
	(in euros)
Product Materials	180.000	✓	Direct cost
Labor	600.000	✓	Direct cost
Salary of Martin Flores	60.000	✘	Direct cost
Renta	30,000	✘	period cost
Annual Equipment Depreciation	75,000	✓	Direct cost
equipment maintenance	25,000	✓	Direct cost
Direct Departmental Expenditure	60.000	✓	Direct cost
Fibertech Distributed Overhead	50,000	✘	period cost
Total cost	1,080,000

David Barrios added that the IT Department can use the space occupied by the PTC Product Department and save €120,000 in annual rent. However, this is a separate topic from the present concern about whether to produce or outsource the PTC product.

On the other hand, Martín Flores pointed out that the outsourcing of PTC production entails various costs of finishing internal production such as:

Loss of inventory LT4

Profit/loss on sale of available LT4
1. Value of LT4 used in the first year (equivalent to 1/3 of the total cost of PTC materials)
PTC material for profit and loss	180,000.00
Multiplied by	1/3
Cost of LT4 used in year 1	60,000.00
2. LT4 in ending inventory and no. of Tons
		cost per ton	# of Tons
Purchase price	300,000.00	120	2,500
used during the first year (1/5)	60,000.00	120	500
Ending Inventory - LT4	240,000.00		2,000
3. Profit/loss on the sale of On-Hand LT4
cost per ton	120.00
SP if sold now	100.00
Loss on Sale of LT4 per Ton	20.00
running out of inventory	2,000
Loss on Sale of LT4 per Ton	40,000.00

machinery cancellation

Gain/Loss on the sale of Equipment	EUR
Machine purchase cost	600,000.00
cumulative dependency
(600k/8 years*4 years)	(300,000.00)
Net book value	300,000.00
Selling price if sold now	(100,000.00)
Loss on the sale of the machine	200,000.00

Compensation for dismissed workers = €660,000

Other restrictions

Detailed report	Amount	cost relevance	Observations
	(in euros)
LT4 loss	40.000	✓	direct material cost
Loss on the sale of the machine	200,000	✓	period cost
Severance pay	660.000	✓	Direct labor cost
IT department building rental	120,000	✓	Opportunity cost

Comparison Table between Manufacturing and Purchase Costs

	cost to make	cost to buy
Offer price		975,000.00
Product Materials	180,000.00
Labor	600,000.00
annual depreciation	75,000.00
equipment maintenance	25,000.00
Direct Departmental Expenditure	60,000.00
IT building rental	120,000.00
Loss of inventory LT4		40,000.00
Loss on Equipment Sale		200,000.00
Severance pay		660,000.00
Total annual cost for 5 years	1,060,000.00	1,875,000.00
Savings to keep/make		815,000.00

Annual Comparison Calendar

	Year 1	year 2	year 3	year 4	year 5	Years 1 to 5
Do	1,060,000.00	1,060,000.00	1,060,000.00	1,060,000.00	1,060,000.00	5,300,000.00
Comprar	1,875,000.00	975,000.00	975,000.00	975,000.00	975,000.00	5,775,000.00
Difference	(815,000.00)	85,000.00	85,000.00	85,000.00	85,000.00	(475,000.00)

Alternative courses of action

ACA 1: Accept Engineering Tools' five-year contract to manufacture the PTC.

PROS:

Increased profit margin of the company.

Eliminate PTC manufacturing cost

High cost margin ratio

PTC factory space used by the IT department will translate into annual rental savings of €120,000

CONTRAS:

Dissolve Fibertec PTC Product Department

Pay severance pay in the amount of EUR 660,000 if management terminates the contracts of PTC Product Department employees

Low quality of PTC product

B. ACA 2: Maintain the PTC product department and continually manufacture the PTC

PROS:

High quality of PTC products

Availability of LT4 materials for five years

The cost of LT4 materials will be fixed for five years

Maintain customer preference in PTC

CONTRAS:

low-profit margin

High general cost (??)

C. ACA 3: Fibertec will only subcontract PTC from Engineering Tools if there are a large number of orders from its large customers/customers and if PTC's product department is unable to produce the PTC units needed to meet the expected delivery date.

PROS:

Higher profit margin

Minimize manufacturing cost

Increase sales or revenue

Conclusion and implementation

Being the CEO, after seeing the cost analysis of the make or buy decision and their respective advantages and disadvantages, we will adopt ACA 2 and ACA 3, that is, manufacture the PTC and in case of temporary excess demand, choose to outsource the production.

The cost-saving strategy is the most common method to secure the bottom line in many companies at the expense of losing jobs. Jobs can be preserved, as can the bottom line when there is transparency and accountability in decision-making.