Make or Buy - DQ - Using strictly a financial basis of evaluation, is it is more beneficial to make or to buy the following subassembly process?
Show your work and all calculations in your answer and express it in terms of net present value.
Assume that you own a firm that manufactures bicycles. That overall task is split into a variety of subassembly processes and your costs for subassembly task 1 are (based on an assumption of annual production of 8000 units):
a) Direct materials at $5 per unit
b) Direct labor at $4 per unit
c) Rent, depreciation, and utilities at $4 per unit
d) Allocation of executive salaries, marketing, corporate taxes at 20% of materials and labor per unit.
e) You expect to manufacture and sell this line of bicycles for a period of 5 years.
At that point, there will be no salvage value remaining to the plant and your space will be reconfigured for a different product.
f) Your costs of materials and labor are expected to increase at the rate of 3% per year. Other costs will remain as stated.
A vendor has proposed to provide the subassembly work at a cost of $14 per unit in year one, increasing their price at the rate of 5% annually over the five-year period.
While outsourcing would enable you to eliminate your direct materials and labor expense, you would retain 50% of the rent depreciation and utilities cost (due to inefficient reuse of the space) and the allocation of executive salaries, marketing, and corporate taxes would be reassessed as 10% of the outsourced cost In both cases, assume a discount rate of 4%