Question
Question 2: What are cost implications if the company explores the option of producing Part Z123 inhouse based on the information and data below? What
Question 2:What are cost implications if the company explores the option of producing Part Z123 inhouse based on the information and data below? What is the expected gross margin if Beta continues to use the exclusive distributor?
Beta's strategic leaders know that the company can produce Part Z123 inhouse. The production equipment along with a U-shape cell is expected to cost $4,000,000. It can lease the equipment for $800,00 per year.The strategic leaders want the production leaders and SCM leaders to consider and assess an option producing Part Z123 inhouse instead of outsourcing it. to the current sourcing of parts from China and selling direct to customers instead of using an exclusive distributor.
In house production will require two operators who can produce 10 parts per hour using the U-shaped line and batch production. The full labor and benefits costs of the operators is $60 per hour (2*$30) and manufacturing overhead is 50% or $30 per hour. Full labor and overhead are expected to be $90 per hour. Inhouse production is expected to require a setup cost of $1000. Material cost is expected to be $20 per part, including scrap and waste disposal. Inventory holding rate is 25% annually. Beta will sell an average of 1667 Z123 parts per month as discussed above.
Beta currently sells all the parts using an exclusive distributor that picks up the part on a just-in time basis. Customer demand is steady and the demand each month is 1667 parts per month as indicated above. There is no seasonal effect. The manufacturer's suggested retail price (MSRP) is $160. The distributor pays Beta $120 per Part Z123. The distributor sells the part to retailers and repair shopsfor $140.
Calculate the increase in gross margin for the inhouse production alternative if revenue is constant under both alternatives at $120 X 20,000 :