Product A Unit Cost Labor
I need help with the first part of this assignment:
During your Supply Chain career, you may find yourself engaged in supporting the decision making process as your company evaluates whether to make or buy products, assemblies, subassemblies or parts. You work for the Titan Braking Systems company (TBS). Management believes that it may be able to lower its costs by outsourcing some of its braking products. You’ve been tasked to quote suppliers for making three products. You’ve received proposals, but recognize the need to assess whether accepting any of these proposals is in TBS’ best interests. It’s not immediately clear if it’s a better financial deal to continue making these products in-house or outsource them. You’ve compiled all available financial data and are ready to begin preparing an assessment. You have the following goals for your assessment:
- You need to determine two benchmarks, against which you’d assess supplier quotes:
- The net present value (NPV) at which TBS is indifferent on whether to outsource the three products or continue making them in-house.
- Finding this value requires you to come up with a unit price based on the Table 1 Unit Production Cost data and then utilize the (10) year sales forecast to come up with annual aggregate production costs. You would then calculate the net present value of these annual costs. Use a 10% discount rate.
- Tip 1: Remember that NPV tables are accessible through a link in our Module 3 folder.
- Tip 2: Coming up with an annual production cost for each product will require you to allocate overhead to production costs. Overhead can allocated based on labor costs; the sum of unit labor and material; or per unit. You may choose your allocation base.
- Finding this value requires you to come up with a unit price based on the Table 1 Unit Production Cost data and then utilize the (10) year sales forecast to come up with annual aggregate production costs. You would then calculate the net present value of these annual costs. Use a 10% discount rate.
- The NPV at which TBS will realize a 10% reduction in costs. This requires you to reduce the projected unit price by 10% in each year and then follow the same steps to develop an NPV, as outlined above.
- The net present value (NPV) at which TBS is indifferent on whether to outsource the three products or continue making them in-house.
Table 1
Sales Forecast and Unit Production Costs
YEAR | |||||||||||
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | ||
Overhead | $1.2 M | $1.2M | $1.2M | $1.2M | $1.2M | $1.2M | $1.2M | $1.2M | $1.2M | $1.2M | |
Product A | |||||||||||
Forecast | 5,000 | 6,000 | 6,500 | 5,500 | 4,400 | 3,900 | 3,500 | 2,500 | 2,000 | 1,000 | |
Labor/Unit | $800 | $800 | $800 | $800 | $800 | $900 | $900 | $900 | $900 | $900 | |
Matl./Unit | $500 | $500 | $500 | $500 | $500 | $550 | $550 | $550 | $550 | $550 | |
Product B | |||||||||||
Forecast | 3,500 | 3,500 | 3,500 | 3,500 | 3,500 | 3,500 | 3,500 | 3,500 | 3,500 | 3,500 | |
Labor/Unit | $900 | $900 | $900 | $900 | $900 | $900 | $900 | $900 | $900 | $900 | |
Matl,/Unit | $650 | $650 | $650 | $650 | $650 | $650 | $650 | $650 | $650 | $650 | |
Product C | |||||||||||
Forecast | 2,500 | 2,500 | 3,000 | 3,200 | 3,500 | 3,700 | 3,900 | 3,800 | 3,800 | 3,800 | |
Labor/Unit | $500 | $500 | $500 | $500 | $500 | $500 | $500 | $500 | $500 | $500 | |
Matl,/Unit | $250 | $250 | $250 | $250 | $250 | $250 | $250 | $250 | $250 | $250 |
I figured out the Unit Price (see attachment) but not sure if the annual aggregate production cost calculations are correct:
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Rating:
/5
Solution: Product A Unit Cost Labor