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Case 4 - David Lum SCM 406W DX-1A Case 1 Outsourcing Demand...

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David Lum SCM 406W 3/25/08 DX-1A Case 1. Outsourcing: Demand for year one: 400,000 units Demand for year two: 400,000 * 1.10 = 440,000 units Demand for year three: 440,000 * 1.10 = 484,000 units Outsourcing Cost per unit = $5.875/ unit + $0.428/unit + $0.132/unit = $6.435/unit Discontinuation Cost = $200,000 Cost for year one = $6.435/unit * 400,000 units = $2,574,000 Cost for year two = $6.435/unit * 440,000 units = $2,831,400 Cost for year three = $6.435/unit * 484,000 units = $3,114,540 Total Costs for all three years = $2,574,000 + $2,831,400 + $3,114,540 + 200,000 = $8,719,940 In sourcing: In sourcing Cost per unit = $2.724/unit + $0.257/unit + $0.908/unit + $0.093/unit + $0.222/unit + $0.099/unit + $7.20/unit = $11.503/unit Annual Demand: 400,000 units Variable burden: $0.908/unit Fixed burden: $0.908*1.5 = $1.362 Total Costs for all three years = 3 * 400,000 units * $(11.503/ unit+$0.908/unit) = $14,893,200 with variable burden only
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= $14,893,201.362 with variable and fixed burden Based on price alone management should choose to outsource for the three years because of the lower variable costs. Even though demand rises by 10% every year that is not as expensive as a higher variable cost from in sourcing, whose biggest variable cost comes from the transfer cost that raises it from $4.303 to $11.503. If the company continues to outsource though, they should consider when the rising cost brought on by rising demand, and see when the in sourcing becomes cheaper. Unless the company has a quality product that no one can duplicate which provides a strong competitive advantage for the electronics firm. Or something this is an intangible which no other company can try to remake. Then the electronics company should switch to outsourcing to improve their competitive advantage with price. The only intangible disadvantage with doing outsourcing to having to switch with many consumes a lot of time or cause problems. 2. Companies decide whether to in source or outsource for various reasons. It can be due to cutting costs because the competitors are also doing it or perhaps the company is a pioneer and sees the benefits of the cost savings. They may in
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