Expected annual sales of tools (in units) Average selling price of tools Price quoted by Taiwanese company, in New Taiwanese Dollars (NTD) Current exchange rate 800,000 $12 175 35NTD = 1$ Variable manufacturing costs $4.75 per unit Incremental annual fixed manufacturing costs associated with the new product line Variable selling and distribution costs Annual fixed selling and distribution costsa $400,000 $1 per unit $220,000 a Selling and distribution costs are the same regardless of whether the tools are manufactured in Mary- land or imported. 1. Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or pur- chase them from the supplier in Taiwan? Explain. 2. Riverside Clippers Corp believes that the U.S. dollar may weaken in the coming months against the New Taiwanese Dollar and does not want to face any currency risk. Assume that Riverside Clippers Corp can enter into a forward contract today to purchase 175 NTD for $5.35. Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or purchase them from the Taiwan supplier? Explain. 3. What are some of the qualitative factors that Riverside Clippers Corp should consider when deciding whether to outsource the garden tools manufacturing to Taiwan? Required

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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International outsourcing. Riverside Clippers Corp manufactures garden tools in a factory in Taneytown, Maryland. Recently, the company designed a collection of tools for professional use rather than consumer use. Management needs to make a good decision about whether to produce this line in their existing space in Maryland, where space is available or to accept an offer from a manufacturer in Taiwan. Data concerning the decision are:

Expected annual sales of tools (in units)
Average selling price of tools
Price quoted by Taiwanese company, in New Taiwanese Dollars (NTD)
Current exchange rate
800,000
$12
175
35NTD = 1$
Variable manufacturing costs
$4.75 per unit
Incremental annual fixed manufacturing costs associated with the new product line
Variable selling and distribution costs
Annual fixed selling and distribution costsa
$400,000
$1 per unit
$220,000
a Selling and distribution costs are the same regardless of whether the tools are manufactured in Mary-
land or imported.
1. Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or pur-
chase them from the supplier in Taiwan? Explain.
2. Riverside Clippers Corp believes that the U.S. dollar may weaken in the coming months against the
New Taiwanese Dollar and does not want to face any currency risk. Assume that Riverside Clippers
Corp can enter into a forward contract today to purchase 175 NTD for $5.35. Should Riverside Clippers
Corp manufacture the 800,000 garden tools in the Maryland facility or purchase them from the Taiwan
supplier? Explain.
3. What are some of the qualitative factors that Riverside Clippers Corp should consider when deciding
whether to outsource the garden tools manufacturing to Taiwan?
Required

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