Joan Riley is the supply manager for Foxcroft Corporation, which is a division of a

large U$.$S$.$ industrial power equipment manufacturer located in northern Virginia. Joan is

the responsible for all Foxcroft purchases. Her largest dollar expenditures are for

electrical components and other mechanical assemblies. Ms$.$ Riley reports to Andrew

Moore, the Division Manager at Foxcroft. Andrew has assigned Joan the responsibility

leading a team charged with analyzing whether Foxcroft should outsource or internally

manufacture a motor assembly. Recently, a Chinese supplier, who produces motors for

several Fortune $500$ companies, has submitted a very competitive quote. However, there

has been a strong bias against outsourcing the motor within the company, particularly

since there is a strong union presence in many of the facilities. The union employees are

extensively trained through an apprentice program. These training programs have

resulted in Foxcroft developing a reputation for outstanding quality. While disputes occur,

there is a spirit of cooperation between the plant employees and management.

This assembly in question controls a key function on a new line of power equipment.

As an initial step, Joan$$s team is responsible for gathering the required information to

guide the firm$$s decision process.

Foxcroft$$s marketing group estimates that volumes for the motor assembly are: Year

$11,500$ units, Year $22,700$ units, and Year $34,000$ units. The Chinese supplier of

electric motors has quoted a price of $$150$ per unit, FOB shipping point, with $10\%$ price

decreases per year for years $2$ and $3.$ Ms$.$ Riley assumes these price decreases are due

to productivity improvements from higher volumes, the positive effects of learning at the

supplier, and greater operating efficiencies. The supplier is not responsible for shipping

and handling costs. Joan estimates they will be $$11\mathrm{.}00$ per unit for all years.

If the new line of industrial power equipment that these motors become part of is

successful, it is estimated that the life cycle will be seven years. There is one motor per

unit of equipment. The volume of the equipment is forecasted to reach a peak of $5,000$

units per year in Year $4$ with $20\%$ reductions per year in volume as the product reaches

the end of its product life cycle. It is estimated that the product will be completely phased

out at the end of year $7.$ The industrial engineering department has provided Joan$$s team with the following per

unit cost estimates for internally manufacturing and assembling the motors during year $1$

of a three$-$year planning cycle:

Direct labor $$18\mathrm{.}750$ Cost of receiving components $$1\mathrm{.}250$

Direct materials $36\mathrm{.}250$ Indirect labor $5\mathrm{.}500$

Factory supplies $3\mathrm{.}135$ Transfer price profit $18\mathrm{.}750$

In addition, initial tooling and line modification costs in Year $1$ would total approximately

$$25,000.$ Fringe benefits for direct labor are $50\%$ of direct labor rates, variable burden is

assigned at $100\%$ of direct labor rates, and fixed overhead is $250\%$ of direct labor rates.

Fringe benefits on indirect labor are assigned at $50\%$ of indirect labor rates.

Depreciation expense and engineering$/$design costs over the next three years are

$$20,000$ and $$80,000,$ respectively, to be spread evenly across the first three years and

be based on unit volume.

In years $2$ and $3,$ Joan$$s buyer has a goal to achieve a $4\%$ annual decrease in material

costs. However, the new $5-$year union contract provides for a $3\%$ rise in direct and indirect

labor rates for years two and three but remains constant for years $4$ & $5.$ Joan assumes

that this contract will increase the per$-$unit direct and indirect labor costs by $3\%.$ Finally,

Mr$.$ Vincent in accounting also claims that because the Foxcroft unit is manufactured by

their division and sold through another internal business unit, a $5\%$transfer$$ price should

be added to the final cost of production. $($Note: as a guide see pp$\mathrm{.}453-455$ in textbook$)$

Assignment

$1.$ Andrew has asked Joan and her team to prepare a three$-$year insource or outsource

analysis on a per$-$unit total cost analysis basis. Joan needs to be sure to include all

quantitative costs. $(15$ pts$)$

$2.$ Further he has asked the team to prepare a seven$-$year make$-$or$-$buy analysis that

looks at the total cost of each sourcing alternative.