Problem:
Salvo Corporation produces cast metal parts used in the plumbing industry. The company is organized into two divisions, mining and casting. Managers of the two divisions are evaluated based on divisionsl ROI.
The mining division sells ore to the casting division as well as to external customers. Currently, the mining division has excessive inventory and has reduced production becuase of weak demand for its product.
In effort to reduce material costs, the material costs, the manager of the casting division obtained bids for the external suppliers to provide the ore. Some external bids were below the prices charged by the mining division at salvo. making purchasing from external sources appear attractive.
Required to do:
A) Identify the relevant facts for the outsourcing decision.
B) Explain why purchasing the ore from an outside company may not be the best decision for salvo.
C) How would capacity and market conditions affect the outsourcing decisions?