Frank has been impressed with your inquisitiveness thus far and seems to have learned quite a bit about supply chain management. He asks Marco and you to dinner at Osito on Tuesday night.

At dinner, Frank mentions that JDM has lost intellectual property through their Taiwanese suppliers. Marco asks what he means by that? Frank used the example of their flagship product, the Cardinal (the Cardinal is JDMs product that competes with the Caffissimo). About 9 months after production started for the Cardinal, JDM found knock-off Cardinals being sold in Taiwan. JDM ceased business with the supplier and found another supplier to manufacture the Cardinal in Taiwan. However, JDM still thinks that their intellectual property is being leaked to other coffee maker companies in Taiwan. They have not seen products sold in the U.S. with their intellectual property but believe that there are coffee makers sold in Asia that use their unique technology.

The next morning, Elise calls to ask you how you and Marco are progressing. You mentioned the conversation with Frank last night. Elise has a high level of interest in the discussion- for the purchase of JDM to be financially viable, she needs to take the Cardinal into international markets. Her thoughts are to make a minor redesign of Cardinal, using some of the intellectual property in the Caffissimo, and use Cardinal to grow markets in Asia and Europe. You tell her that you have some ideas regarding the manufacturing of Cardinaland will conduct more analysis today.

At CCDs office, you ask Frank for more information regarding the Cardinal supply chain and its design. He provides you the following information from the current supplier in Taiwan:

Direct Material Cost: $235

Direct Labor Cost: $20

Supplier Price to JDM: $335

There are no fixed costs to purchase from the supplier. Annual sales volume is 120,000 units per year. Sales have been growing at 15% per year. The current price of Cardinal is $575 per unit.

You want to estimate the cost to manufacture the Cardinal at Primo Cafs factory in Grand Rapids. You estimate that Primo Cafs direct labor will be $40 since wages are higher in Grand Rapids. You believe that the material cost will be the same. Variable overhead in Grand Rapids is 120% of direct labor. Also, you assume that the annual fixed manufacturing overhead is $1,700,000 based on Caffissimos fixed manufacturing overhead. While Elise mentioned that there would be slight design changes to Cardinal to add Caffissimos intellectual property, assume that the cost structure changes would be negligible.

Current Sales/year In-House (Cost to Make) Direct Materials Direct Labor 120,000 Year 0 1 2 3 5 Projected Sales 120,000 138,000 Projected Total Revenue $ $ S 158,700 - S 182,505 209,881 241,363 $ $ In-House - Annual Variable Mfg Overhead Variable Cost Total Variable Costs Per Unit Fixed Cost Fixed Mfg Overhead Outsource (Cost to Buy) Price Per Unit Fixed Cost (Buy) Total Cost S Projected Total Profit $ Buy per unit-Annual Fixed Cost (Buy) $ Total Cost $ $ $ $ S $ Total Cost to Buy Total Profit S $ $ $ $ Revenue Per Unit In-House > Outsource $ $ S $ S Annual Sales Unit Increase (year over year) 15% Indifference Point Q-(FFC)/(-)-