Chapter 17, Problem 5P

a)

Summary Introduction

To determine: The total cost of supplying the product from Country C.

Introduction:

Supplier selection is the process of evaluating the performance of each supplier and comparing it with in-house production to choose the capable supplier to support the output of the organization.

Explanation of Solution

Given information:

Company D is considering outsourcing the manufacturing of furniture to Country C, which is now manufactured in State S. When the furniture is produced in Country C, the direct labor cost would be 60 percent of Country U’s cost. The overhead cost would be 60 percent of Country U’s cost. Materials’ cost will be 10 percent lower in Country C. The transportation cost is given as $27,000 for seven containers, with an annual supply of 500 units.

It takes $12,000 to monitor and inspect the supplier and units produced in Country C. Administrating cost is given as $5,000 per year. Company D is currently situated in Country U. In addition to the above information, the following information is given:

Unit cost of goods sold
Direct labor	53
Materials	122
Overhead	49
Total	224

Determine the total cost of supplying the product from Country C:

Direct labor	31.80
Materials	109.80
Overhead	29.40
Transportation	54.00
Inspection	24.00
Administration	10.00
Total	259.00

Working note:

Compute direct labor:

It is given that the direct labor cost would be 60 percent of Country U’s cost.

$\begin{array}{c}\text{Direct labor}=0.60\times 53\\ =31.80\end{array}$

Compute materials’ cost:

It is given that the materials’ cost would be 10 percent lower in Country C, when compared to Country U’s cost.

$\begin{array}{c}\text{Material cost}=0.90\times 122\\ =109.80\end{array}$

Compute overhead cost:

It is given that the overhead cost would be 60 percent of Country U’s cost.

$\begin{array}{c}\text{Overhead cost}=0.60\times 49\\ =29.40\end{array}$

Compute transportation cost:

The transportation cost is given as $27,000 for seven containers with the annual supply of 500 units.

$\begin{array}{c}\text{Transportation cost}=\frac{27,000}{500}\\ =54\end{array}$

Compute inspection cost:

It takes $12,000 to monitor and inspect the supplier and units produced in Country C.

$\begin{array}{c}\text{Inspection cost}=\frac{12,000}{500}\\ =24\end{array}$

Compute administration cost:

Administration cost is given as $5,000 per year in Country C.

$\begin{array}{c}\text{Administration cost}=\frac{5,000}{500}\\ =10\end{array}$

Hence, the total cost of producing in Country C is $259 (refer to the table).

b)

Summary Introduction

To determine: The risk associated with Country C’s supplier.

Introduction:

Supplier selection is the process of evaluating the performance of each supplier and comparing it with in-house production to choose the capable supplier to support the output of the organization.

Explanation of Solution

Given information:

Company D is considering outsourcing the manufacturing of furniture to Country C, which is now manufactured in State S. When the furniture is produced in Country C, the direct labor cost would be 60 percent of Country U’s cost. The overhead cost would be 60 percent of Country U’s cost. Materials’ cost will be 10 percent lower in Country C. The transportation cost is given as $27,000 for seven containers, with an annual supply of 500 units.

It takes $12,000 to monitor and inspect the supplier and units produced in Country C. Administrating cost is given as $5,000 per year. Company D is currently situated in Country U. In addition to the above information, the following information is given:

Unit cost of goods sold
Direct labor	53
Materials	122
Overhead	49
Total	224

The risks associated with Country C’s supplier are as follows:

• Risk of quality,
• Delivery issues,
• Rising of unit cost in future,
• Currency risk.

c)

Summary Introduction

To determine: Whether the firm should outsource or not.

Introduction:

Supplier selection is the process of evaluating the performance of each supplier and comparing it with in-house production to choose the capable supplier to support the output of the organization.

Explanation of Solution

Given information:

Company D is considering outsourcing the manufacturing of furniture to Country C, which is now manufactured in State S. When the furniture is produced in Country C, the direct labor cost would be 60 percent of Country U’s cost. The overhead cost would be 60 percent of Country U’s cost. Materials’ cost will be 10 percent lower in Country C. The transportation cost is given as $27,000 for seven containers, with an annual supply of 500 units.

It takes $12,000 to monitor and inspect the supplier and units produced in Country C. Administrating cost is given as $5,000 per year. Company D is currently situated in Country U. In addition to the above information, the following information is given:

Unit cost of goods sold
Direct labor	53
Materials	122
Overhead	49
Total	224

Determine whether the firm should outsource or not:

The total cost of producing the product from Country C is $259 and the cost of producing in-house is $224. Hence, the products should not be outsourced to Country C, as it incurs more cost than producing it in-house.

d)

Summary Introduction

To determine: Why the total cost is expensive, even though the labor cost is less.

Introduction:

Supplier selection is the process of evaluating the performance of each supplier and comparing it with in-house production to choose the capable supplier to support the output of the organization.

Explanation of Solution

Given information:

Company D is considering outsourcing the manufacturing of furniture to Country C, which is now manufactured in State S. When the furniture is produced in Country C, the direct labor cost would be 60 percent of Country U’s cost. The overhead cost would be 60 percent of Country U’s cost. Materials’ cost will be 10 percent lower in Country C. The transportation cost is given as $27,000 for seven containers, with an annual supply of 500 units.

It takes $12,000 to monitor and inspect the supplier and units produced in Country C. Administrating cost is given as $5,000 per year. Company D is currently situated in Country U. In addition to the above information, the following information is given:

Unit cost of goods sold
Direct labor	53
Materials	122
Overhead	49
Total	224

Determine why the total cost is expensive even though the labor cost is less:

It is expensive in Country C due to inspection cost, administration cost, and transportation cost. As the furniture is a heavy product, the transportation cost would be high. Hence, producing in Country C is expensive, even though the labor cost is less.