Question: Pavlick Products supplies a key component for automobile interiors to U.S. assembly plants. The components can be manufactured in China or Mexico. Unit cost in China is $333, and the unit cost in Mexico is $350. However, shipping costs per 500 units are $10,000 from China, and only $2,000 from Mexico and are expected to increase 4% each month from China and 1% each month from Mexico. Each unit is sold to the automotive customer for $400. Contracts with the Chinese vendor require that a minimum of 2,500 units be produced each month. Demand for the next 12 months is estimated to be:
The Mexican plant is new and is gearing up production; its capacity will increase over the next year as follows:
How should the company source production to maximize total profit?