One of your Taiwanese suppliers has bid on a new line of molded plastic parts that is currently being assembled at your plant. The supplier has bid $0.10 per part, given a forecasted demand of 200,000 parts in year 1; 300,000 in year 2; and 500,000 in year 3. Shipping and handling of the parts from the supplier's factory is estimated at $0.01 per unit. Additional inventory handling charges should amount to $0.005 per unit. Finally, administrative costs are estimated at $20 per month.
Although your plant is able to continue producing the part, the plant would need to invest in another molding machine, which would cost $10,000. Direct materials can be purchased for $0.05 per unit. Direct labor is estimated at $0.03 per unit plus 50% benefits. Up-front engineering and design costs will amount to $30,000. Finally, management has insisted that overhead be allocated if the parts are made in-house at a rate of 100% of direct labor cost. The firm uses a cost of capital of 15% per year.
What should you do, continue to produce in-house or accept the bid from your Taiwanese supplier?