1. In the Donley Brothers case (reprinted later in this exam) that we studied, let’s say that we could purchase an inspection process that is able to screen the incoming rough castings to find the latent defective castings and send only the good castings to machining. This inspection is 100% reliable; i.e., it always finds the defective castings, and never is in error. Unfortunately, the contract with our suppliers does not allow us to send back the defective castings for credit; we still have to buy 1140 castings to get the 1000 good ones. We will, however, only have to machine good castings. Since we would now only have to machine good castings, the cost accountants recalculated the cost under this new situation; the new costs would be direct labor of $100 per unit, plus overhead of 167% of direct labor (of which $78 per unit is variable overhead and the rest is fixed). These costs only apply to this situation where we are machining only good castings.
Assume that we still have the reject rate for rough castings as discussed in the case and we will not purchase the machined castings from Akron. Assume that other costs that cannot be determined, such as disruption and lost sales costs, will not be factored into this analysis. Assume that the annual demand will be 1000 good machined castings per year (as was discussed in the case).
What is the maximum annual amount that you would be willing to pay for the inspection process? Justify this amount and provide your numerical analysis.
2. Study the Maine-Barnes Ltd. Case attached. Discuss the following factors in relation to the make-buy decision in this case:
1) Capacity considerations,
2) manufacturing jobs and work-force stability for Maine-Barnes,
3) design secrecy,
4) control of quality,
5) control of delivery performance,
6) management control of costs, and
7) the cost of make vs. buy.