Mowerson Division of Brown Instruments manufactures testing equipment for the automobile industry. Mowerson s equipment is used on automobile assembly lines for component testing and for recording and measurement purposes during track and road tests. Its sales have grown steadily, and, in 2005, revenue will exceed $20 million for the first time in the companys history. Mowerson designs and manufactures its own printed-circuit boards (PCBs) for use in the test equipment.

The PCBs when assembled impart critical functionality and performance to the finished equipment.

The PCBs are pieced together by hand by 44 technicians in the assembly department.

Due to increased competition and pressure to achieve higher levels of profitability, Mowerson is considering outsourcing the printed-circuit boards to Tri-Star, a new player in the contract manufacturing field. According to preliminary data, the cost of the circuit boards from Tri-Star is apparently slightly lower than the full cost of manufacturing them in-house.

Jim Wright, a recently hired cost analyst, was asked to prepare an evaluation of the costs and benefits of outsourcing the PCBs. Wrights report, shown in Exhibit 1, includes the assumptions he used in this analysis, along with his recommendation. The notes and detailed assumptions Wright used in his analysis are presented below:

Exhibit 1 - Annual Cost Saving for Tri-Star Contract
Savings:
1. Assembly technicians ($40,000 * 40)	$1600000
2. Assembly supervisor	75000
3. Floor space (10,000 * $18.00)	180000
4. Purchasing clerk (1/2 time on special project)	20000
5. Outsourcing to Tri-Star
[($50.00 - $47.00) * 100,000 units]	300000
Total saving	$2175000
Cost:
6. Severance payments	320000
7. Junior engineer	50000
8. Quality-control inspector	35000
9. Storage cost (5,000 units @ $5.00/unit)	25000
Total cost	$430000
Net annual saving	$1745000

Personnel:

The number of assembly department technicians will be reduced by 40, at an annual saving (salary plus benefits) of $40,000 each. The remaining 4 technicians will remain on Mowersons payroll and will assist the field service department with repair work on the boards. The assemblers have always assisted in repair work when not busy in assembly (historically about 10% of their total time).

The company has historically had a policy of granting severance payments equal to 20% of salaries and benefits.

The supervisor of the assembly department will remain with Mowerson because he has only 2 years until retirement. A position will be created for him in the machining department, where he will serve as a special consultant.

Because purchasing and stocking the component parts for PCB assembly will no longer be needed, a purchasing clerk in this area will be reassigned 1/2-time to a special project in another area until his time can be more fully utilized. The clerk will still earn the same salary.

A junior engineer will be hired to act as liaison between Mowerson and the manufacturer of the PCBs.

In addition, a third quality-control inspector will be needed to monitor the vendors adherence to quality standards.

Floor Space

For the past 2 years, to accommodate the overflow of assembly work, Mowerson has rented, on a month-to-month basis, 10000 square feet of space for $1.50 per square foot per month in a neighboring building.

The 8000 square feet currently being used in Mowersons main plant by the assembly department could be reclaimed for other manufacturing storage, etc. The plants annual depreciation charge for floor space is $6 per square foot.

Production Cost and Volume

Mowersons standard cost per unit for manufacturing PCBs, based on volume of 100,000 units, is as follows:

Direct materials	$24
Direct labor (assembly department technicians)	17
Variable overhead	4
Fixed overhead	5
Total cost	$50

The direct materials cost includes costs of major components, etc. Variable overhead includes smaller amounts for indirect materials (solder, etc.) and indirect labor (material ordering and handling, maintenance, etc.). Fixed overhead includes depreciation charges and allocations of other factory fixed costs (plant administration salaries, etc.).

Aside from coordination costs for liaison and quality control, etc. at Mowerson, Tri-Star would be fully responsible for the costs of producing the circuit boards. Tri-Star will charge $47 per complete board, assembled and delivered.

Mowersons production volume of printed-circuit boards for the past 2 years has been 80,000 and 90,000 boards, respectively. Projected production volume for next year is 100,000 units.

Storage Costs

Because of the uncertainty in manufacturing and delivery schedules, the level of safety stock on hand will be 5,000 boards. The variable cost to store the PCBs is $5 per board per year. Existing operations requires a safety stock of 1,000 boards on hand.

Other

The equipment used in making PCBs has negligible value. Any proceeds from its sale will be offset by the cost of disposal.

Requirements:

a. As appropriate prepare a revised schedule relevant to the outsourcing decision. You may find that a completely different schedule format makes the analysis more understandable.

Write a brief response supporting or rebutting Wrights analysis.

b. Are there other issues that Mowerson should consider before reaching a final decision on the Tri-Star contract?

c. Consider the cost of inputs in producing something like a finished circuit board. Outsourcing or relocating is a common feature in todays economy. What do you think are the underlying economics that drive outsourcing or relocating?