Response to the following problem:
Bernie's Bears, Inc., manufactures plush toys in a facility in Cleveland, Ohio.
Recently, the company designed a group of collectible resin figurines to go with the plush toy line. Management is trying to decide whether to manufacture the figurines themselves in existing space in the Cleveland facility or to accept an offer from a manufacturing company in Indonesia. Data concerning the decision follows:
Expected annual sales of figurines (in units)...................................................... 400,000
Average selling price of a figurine........................................................................ $5
Price quoted by Indonesian company, in Indonesian Rupiah (IDR), for each figurine...27,300 IDR
Current exchange rate.........................................................................9,100 IDR = $1
Variable manufacturing costs..................................................................$2.85 per unit
Incremental annual fixed manufacturing costs associated with the new product line........$200,000
Variable selling and distribution costsa......................................................$0.50 per unit
Annual fixed selling and distribution costsa.......................................................$285,000
a Selling and distribution costs are the same regardless of whether the figurines are manufactured in Cleveland or imported.
Required:
1. Should Bernie's Bears manufacture the 400,000 figurines in the Cleveland facility or purchase them from the Indonesian supplier? Explain.
2. Bernie's Bears believes that the US dollar may weaken in the coming months against the Indonesian
Rupiah and does not want to face any currency risk. Assume that Bernie's Bears can enter into a forward contract today to purchase 27,300 IDRs for $3.40. Should Bernie's Bears manufacture the 400,000 figurines in the Cleveland facility or purchase them from the Indonesian supplier? Explain.
3. What are some of the qualitative factors that Bernie's Bears should consider when deciding whether to outsource the figurine manufacturing to Indonesia?