Question: A line of furniture is made by the Drazal Company in South Carolina and is being considered for outsourcing to China. The unit manufacturing costs in the U.S. are:
When produced in China, direct labor will be 60 percent of the U.S. cost and overhead will also be 60 percent of the U.S. cost, since it consists mostly of salaries. Materials costs will be 10 percent lower in China. Transporting the furniture from China will cost $27,000 for seven containers to transport the annual supply of 500 units from the factory in China to the Drazal warehouse in the U.S. by rail, truck, and sea. To ensure quality, it will cost $12,000 per year to monitor the supplier and inspect the units in China before they are sent. The cost of administering the contract is $5,000 per year.
a. What are the total costs of supplying this product from China?
b. What risks are associated with the Chinese supplier?
c. Should the product be outsourced to China?
d. Why is it so expensive to make this product in China when the labor is so cheap?