Question: Berry Computer is considering moving some of its operations overseas in order to reduce labor costs. In the United States, its main circuit board costs Berry $75 per unit to produce, while overseas it costs only $65 to produce. Holding costs are based on a 20 percent annual interest rate, and the demand has been a fairly steady 200 units per week. Assume that setup costs are $200 both locally and overseas. Production lead times are one month locally and six months overseas.
a. Determine the average annual costs of production, holding, and setup at each location, assuming that an optimal solution is employed in each case. Based on these results only, which location is preferable?
b. Determine the value of the pipeline inventory in each case. (The pipeline inventory is the inventory on order.) Does comparison of the pipeline inventories alter the conclusion reached in part (a)?
c. Might considerations other than cost favor local over overseas production?