Primo Caf is thinking about outsourcing production the Bean Boiler. Currently, the cost of producing the Bean Boiler in-house is $13 per unit. You have found a supplier - Legit Mfg LLC - who can produce the Bean Boiler at $12.50 per unit. Legit Mfg has the capacity to produce the Bean Boiler in large volumes (30,000 units per production run). Primo Caf sells up to 304,500 Bean Boilers per year - so your plan is to buy 300,000 units from Legit Mfg and make any additional units in-house. Legit Mfg quotes you a contract price of $3,450,000 for 300,000 units based on the following cost information. 50% Legit Manufacturing LLC DM $ 1.10 DL $ 6.59 OH $ 3.30 Tooling $ 0.05 COGS $ 11.04 SG&A $ 1.10 TC $ 12.14 Profit $ 0.36 Sell Price $ 12.50 10% 3% You know that Legit Mfg will have to retrain their employees to accommodate production of the Bean Boiler as well as retool some of their existing machinery. But - having seen the Bean Boiler produced in- house you also know that once employees learn the new process, production becomes relatively standardized after the first run. Based on this knowledge, you believe that Legit Mfg's cost model needs to be adjusted in a few ways: The product price should be calculated without tooling cost and should reflect an 70% learning curve. After calculating the product price per unit for each run the tooling cost should be added back in to arrive at a total price per unit for each run. Marco wants a recommendation on what Primo Caf should do. Given the information above - and what you know about the product you are sourcing - what would you recommend? Why? Be sure to apply the learning curve to the cost plus (should cost) model above to support your answer. Primo Caf is thinking about outsourcing production the Bean Boiler. Currently, the cost of producing the Bean Boiler in-house is $13 per unit. You have found a supplier - Legit Mfg LLC - who can produce the Bean Boiler at $12.50 per unit. Legit Mfg has the capacity to produce the Bean Boiler in large volumes (30,000 units per production run). Primo Caf sells up to 304,500 Bean Boilers per year - so your plan is to buy 300,000 units from Legit Mfg and make any additional units in-house. Legit Mfg quotes you a contract price of $3,450,000 for 300,000 units based on the following cost information. 50% Legit Manufacturing LLC DM $ 1.10 DL $ 6.59 OH $ 3.30 Tooling $ 0.05 COGS $ 11.04 SG&A $ 1.10 TC $ 12.14 Profit $ 0.36 Sell Price $ 12.50 10% 3% You know that Legit Mfg will have to retrain their employees to accommodate production of the Bean Boiler as well as retool some of their existing machinery. But - having seen the Bean Boiler produced in- house you also know that once employees learn the new process, production becomes relatively standardized after the first run. Based on this knowledge, you believe that Legit Mfg's cost model needs to be adjusted in a few ways: The product price should be calculated without tooling cost and should reflect an 70% learning curve. After calculating the product price per unit for each run the tooling cost should be added back in to arrive at a total price per unit for each run. Marco wants a recommendation on what Primo Caf should do. Given the information above - and what you know about the product you are sourcing - what would you recommend? Why? Be sure to apply the learning curve to the cost plus (should cost) model above to support your
