Question

A large global automobile manufacturer is considering outsourcing the manufacturing of a solenoid used in the transmission of its SUVs. The company estimates that annual fixed costs of manufacturing the part in-house, which include equipment, maintenance, and manage-ment, amounts to $6 million. The variable costs of labor and material are $5.00 per unit. The company has an offer from a major subcontractor to produce the part for $8.00 per unit. However, the subcontractor wants the company to share in the costs of the equipment. The automobile company estimates that the total cost would be $4 million, which also includes management oversight for the new supply contact

Required:
a. How many solenoids would the automobile company need per year to make theâ in-house option leastâcostly?
b. What otherâ factors, besidesâ costs, should the automobile company consider before revising its supply chain forâ SUVs?

Answer 1

A) The company must consume more than 666667 solenoids per year to make the in-house option least costly.

B) - quality of the product

- prompt delivery of products

- good communication & relationship with external parties.

Step-by-step explanation:

A) Since if they use a subcontractor, they will share part of the equipment cost, Let the cross over point for manufacturing the solenoid in house and using a contractor be denoted as x.

Now, variable costs of labor and material are $5.00 per unit. This is 5x

Also from the subcontractor, production of the part is estimated at $8.00 per unit. This is 8x.

Thus;

6000000 + 5x = 4000000 + 8x

Rearranging, we have;

6000000 - 4000000 = 8x - 5x

3x = 2000000

x = 2000000/3

x ≈ 666667

Thus, the company must consume more than 666667 solenoids per year to make the in-house option least costly.

B) Apart from cost, other factors the company must consider are quality of the product, prompt delivery of products, good communication & relationship with stakeholders involved.