International outsourcing. Bernie's Bears, Inc., manufactures plush toys in a facility in Cleveland, Ohio. Recently, the company designed a group of collectible resin figurines to go with the plush toy line. Management is trying to decide whether to manufacture the figurines themselves in existing space in the Cleveland facility or to accept an offer from a manufacturing company in Indonesia. Data concerning the decision follows:

Expected annual sales of figurines (in units)

415,000

Average selling price of a figurine

$4

Price quoted by Indonesian company, in Indonesian Rupiah (IDR), for each figurine

24000 IDR

Current exchange rate

10000 IDR = $1

Variable manufacturing costs

$2.85 per unit

Incremental annual fixed manufacturing costs associated with the new product line

$170000

Variable selling and distribution costs^a

$0.75 per unit

Annual fixed selling and distribution costs^a

$300 000

A Selling and distribution costs are the same regardless of whether the figurines are manufactured in Cleveland or imported.

QUESTIONS

1.Should Bernie's Bears manufacture the 415,000 figurines in the Cleveland facility or purchase them from the Indonesian supplier? Explain.

2.Bernie's Bears believes that the US dollar may weaken in the coming months against the Indonesian Rupiah and does not want to face any currency risk. Assume that Bernie's Bears can enter into a forward contract today to purchase 24000 IDRs for $2.40. Should Bernie's Bears manufacture the 415,000 figurines in the Cleveland facility or purchase them from the Indonesian supplier? Explain.

3.What are some of the qualitative factors that Bernie's Bears should consider when deciding whether to outsource the figurine manufacturing to Indonesia?