One of your Taiwanese suppliers has bid on a new line of molded plastic parts that is currently being assembled at your plant. The supplier has bid $$0\mathrm{.}10$ per part, given a forecast you provided of $200,000$ parts in year $1$; $400,000$ in year $2$; and $600,000$ in year $3.$ Shipping and handling of parts from the supplier$$s factory is estimated at $$0\mathrm{.}01$ per unit. Additional inventory handling charges should amount to $$0\mathrm{.}004$ per unit. Finally, administrative costs are estimated at $$30$ per month.

Although your plant is able to continue producing the part, the plant would need to invest in another molding machine, which would cost $$20,000.$ Direct materials can be purchased for $$0\mathrm{.}06$ per unit. Direct labor is estimated at $$0\mathrm{.}04$ per unit for wages plus a $50$ percent surcharge for benefits and, indirect labor is estimated at $$0\mathrm{.}008$ per unit plus $50$ percent benefits. Up$-$front engineering and design costs will amount to $$40,000.$ Finally, management has insisted that overhead be allocated if the parts are made in$-$house at a rate of $100$ percent of direct labor wage costs. The firm uses a cost of capital of $15$ percent per year.

a$.$ Calculate the difference in NPVs between the Make and Buy options. Express all costs as positive values in your calculations. It is suggested to use the NPV function in Excel. $($Do not round intermediate calculations. Round your answer to $2$ decimal places.$)$

b$.$ Should you continue to produce in$-$house or accept the bid from your Taiwanese supplier?

multiple choice

Produce in$-$house

Accept the bid