aine ames wasa success sma rrn carv ou apro entc e In e e nlc ofce products eld. A proposed new line of sophisticated professional calculators currently posed some manufacturing problems for the firm because of limited shop capacity. .losh Purdy, the rm's supply management director, was asked to investigate the possibility of subcontracting one ofthe components to an outside sourceand then to prepare a makeorbuy recommendation for the general manager. MaineBames was located near Boston in the heart of a hightech manufacturing community. The firm's success was due primarily to its ability to produce hi ghquality specialty products designed for particular professional uses by engineers, architects, medical researchers, nancial analysts, and so on. Product technology in the eld was undergoing continual change. As a result, product prices had dropped markedly during the past two years, and competition in the market was keen and fast paced. The proposed line of new calculators was designed to be highly price competitive. Consequently, a permanent rechargeable battery powered the units. This meant that each unit was sold with a small plugin recharging unit. Although the recharger increased the initial cost of the unit somewhat, the user realized signicant operating cost savings during the life of the product. In addition to an attractive life cycle cost, Maineames was banking on several unique proprietary design features ofthe calculator and the recharging unit to generate a high demand for the new product line. Unfortunately, the new design features were not patentable. Despite the general manager's optimistic views for the new product line, the marketing manager was unable to forecast demand for the new units with what he considered to be a comfonable level of accuracy. Because of competition and rapidly changing technology in the industry, he was not willing to forecast firstyear sales of more than 50,000 units. If the line was well received, he estimated that approximately |00,000 units could be sold in each of the two succeeding years. MaineDames had grown steadily during the past five years and was now operating near its manufacturing capacity. The shop manager cautioned that addition of the new calculator line would stretch the operation to its limit. in fact, thither analysis revealed that the shop could handle no more than 75,000 new calculator units per yearand this was without producing the companion recharger units. If MaineBarnes were to produce the recharger units too, it would have to invest approximately $84,000 in new equipment. The life of the equipment would be approximately twelve years. For tax purposes, however, the Internal Revenue Service would permit it to be depreciated over a sevenyear period. As a result of the preceding analysis, .Tosh Purdy requested bids from three former suppliers for the new recharger unit. All three were known to be competent and reliable; their bids are summarized below. BIDS ON THE RECHARGER UNIT ($ per unit) Purl: him! qt}: Eastern Mfg. Boston Electrical D & A Mfg. 50110\" $315 $145 $132 tsmn 163 7'. IE 145 memo we. (17"? 1 ID In response to Josh's inquiry, all three rms indicated an interest in discussing the possibility ofa threeyear, singlesource contract. All were willing to discuss bid prices further if a threeyear deal could be worked out. Alter reviewing the bid figures, Josh discussed the possibility of making the recharger in house with the shop manager and the firm's chief cost accountant. Several days later, Josh received the following estimated cost data from the controller's ofce. ln-house unit costs to make the recharger Direct labor 1* Lil] Materials 3.00 Factory overhead (1 \"1% direct labor] |.65 Factory cost 6. l5 General administrative and selling expense { |D% factory cost) .Z $6.17 per unit Notes: |. Materials cost includes a 20 percent internal material handing cost. 2.. Factory overhead is estimated to be 35 percent variable and 65 percent fixed. Alter studying the cost estimate, Josh was not certain that it was complete. For example, he wondered why an allowance of 15 percent had been made for scrap material but none for labor. [[e was also puzzled about the overhead gures. The controller indicated that there would be no reduction in overhead ifthe new equipment was purchasedand that the amortization of the new equipment would constitute an additional expense. Josh was also aware that the tirm's labor contract expired in several months. In the past, subcontracting work to outside suppliers had always been a sensitive issue with the union, although wage rates seemed to be particularly important this year. 1. What factors should Josh consider in conducting a makeorbuy analysis for this product? 2. Prepare a comparative cost analysis of the makea'buy alternatives. Which cost elements should be investigated particularly caretully? Discuss thoroughly. 3. Prepare a complete report for the general manager, including the details of your analysisand your recommendation