Nevada Pen Company manufactures a full line of premium writing instruments. It has 12 different styles and within each style, it offers ball point pens, fountain pens, mechanical pencils, and a roller ball pen. Most models also come in three finishes- gold, silver, and black matte. Nevada Pen's Bangkok, Thailand, plant manufactures four of the styles. The plant is currently producing the gold clip for the top of one of its pen styles, no. 872. Current production is 1,500 gold no. 872 pens each month at an average cost of 90 baht per gold clip. (One U. S. dollar currently buys 32.25 baht.) A Chinese manufacturer has offered to produce the same gold clip for 50 baht. This manufacturer will sell Nevada Pen 600 clips per month. If it accepts the Chinese offer and cuts the production of the clips from 1,500 to 900, Nevada Pen estimates that the cost of each clip it continues to produce will rise from 90 baht to 118 baht per gold clip. Required: Compute the difference in cost of making the clips versus outsourcing the clips. Should Nevada Pen outsource the clips to the Chinese firm? Explain why or why not. What additional information would you seek before deciding to outsource the clips to the a. b. Chinese firm? At what price would Nevada Pen be indifferent to outsourcing the clips? (That is, at what price would the difference be zero?) C.
Nevada Pen Company manufactures a full line of premium writing instruments. It has 12 different styles and within each style, it offers ball point pens, fountain pens, mechanical pencils, and a roller ball pen. Most models also come in three finishes- gold, silver, and black matte. Nevada Pen's Bangkok, Thailand, plant manufactures four of the styles. The plant is currently producing the gold clip for the top of one of its pen styles, no. 872. Current production is 1,500 gold no. 872 pens each month at an average cost of 90 baht per gold clip. (One U. S. dollar currently buys 32.25 baht.) A Chinese manufacturer has offered to produce the same gold clip for 50 baht. This manufacturer will sell Nevada Pen 600 clips per month. If it accepts the Chinese offer and cuts the production of the clips from 1,500 to 900, Nevada Pen estimates that the cost of each clip it continues to produce will rise from 90 baht to 118 baht per gold clip. Required: Compute the difference in cost of making the clips versus outsourcing the clips. Should Nevada Pen outsource the clips to the Chinese firm? Explain why or why not. What additional information would you seek before deciding to outsource the clips to the a. b. Chinese firm? At what price would Nevada Pen be indifferent to outsourcing the clips? (That is, at what price would the difference be zero?) C.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Nevada Pen Company manufactures a full line of premium writing instruments. It has 12 different styles
and within each style, it offers ball point pens, fountain pens, mechanical pencils, and a roller ball pen.
Most models also come in three finishes- gold, silver, and black matte. Nevada Pen's Bangkok,
Thailand, plant manufactures four of the styles. The plant is currently producing the gold clip for the top
of one of its pen styles, no. 872. Current production is 1,500 gold no. 872 pens each month at an
average cost of 90 baht per gold clip. (One U. S. dollar currently buys 32.25 baht.) A Chinese
manufacturer has offered to produce the same gold clip for 50 baht. This manufacturer will sell Nevada
Pen 600 clips per month. If it accepts the Chinese offer and cuts the production of the clips from 1,500
to 900, Nevada Pen estimates that the cost of each clip it continues to produce will rise from 90 baht to
118 baht per gold clip.
Required:
a.
Compute the difference in cost of making the clips versus outsourcing the clips. Should Nevada
Pen outsource the clips to the Chinese firm? Explain why or why not.
What additional information would you seek before deciding to outsource the clips to the
b.
Chinese firm?
At what price would Nevada Pen be indifferent to outsourcing the clips? (That is, at what price
would the difference be zero?)
с.
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