Riverside Clippers Corp manufactures garden tools in a factory in Taneytown, Maryland. Recently, the company designed a collection of tools for professional use rather than consumer use. Management needs to make a good decision about whether to produce this line in their existing space in Maryland, where space is available or to accept an offer from a manufacturer in Taiwan. Data concerning the decision are:Expected annual sales of tools (in units) 800,000Average selling price of tools $12Price quoted by Taiwanese company, in New Taiwanese Dollars (NTD) 175Current exchange rate 35 NTD = 1$Variable manufacturing costs $4.75 per unitIncremental annual fixed manufacturing costs associated with the new product line $400,000Variable selling and distribution costs $1 per unitAnnual fixed selling and distribution costs $220,000Selling and distribution costs are the same regardless of whether the tools are manufactured in Maryland or imported1) Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or purchase them from the supplier in Taiwan? Explain.2) Riverside Clippers Corp believes that the US dollar may weaken in the coming months against the New Taiwanese Dollar and does not want to face any currency risk. Assume that Riverside Clippers Corp can enter into a forward contract today to purchase 175 NTD at $5.35.Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or purchase them from the Taiwan supplier? Explain.4) What are some of the qualitative factors that Riverside Clippers Corp should consider when deciding whether to outsource the garden tools manufacturing to Taiwan?

Riverside Clippers Corp

Make or Buy Decision:

1) Riverside Clippers Corp should purchase them from the supplier in Taiwan.  It should not manufacture the 800,000 garden tools in the Maryland facility.  It costs $0.25 per unit more to manufacture the tools in-house, or a total of $200,000 ($0.25 * 800,000).  However, this savings in costs should be compared to the freight and other logistics costs that will be incurred to get the tools into the US location.

2. Assuming that Riverside Clippers Corp can enter into a forward contract today to purchase NTD 175 at $5.35, it should manufacture the 800,000 garden tools in the Maryland facility instead of purchasing them from the Taiwan supplier.  It is cheaper to manufacture in-house than to outsource at any price above $5.25.

3. Apart from costs, which is a quantitative factor, some qualitative factors that Riverside Clippers Corp should consider when deciding whether to outsource the garden tools manufacturing to Taiwan are:

a) Exchange Rate Risks, caused by the weakening of one currency against the other.

b) Are the Taiwan company the right outsourcing company?  Will they protect Riverside's intellectual property?

c) Will the outsourcing bring in some advantages to the company by enabling it, for example, to focus its in-house talents on strategy and innovation?

d) Does the outsourcing company in Taiwan have stability with regard to employees turnover?

e) Experience of the outsourcing company is also relevant.

f) When the initial decision above was made to outsource, the freight-in was not taken into consideration.  Location costs may outstrip the cost-savings.

g) Scalability enables Riverside to get things done quickly.  Will outsourcing enable scalability to be achieved?

Explanation:

a) Data and Calculations:

Expected annual sales of tools = 800,000 units

Average selling price of tools = $12

Price by Taiwanese company = NTD 175 (New Taiwanese Dollars)

Current exchange rate = NTD 35 = $1

Price by Taiwanese company in US dollars = $5 (175/35)

In-house manufacturing costs:

Variable manufacturing costs = $4.75 per unit

Incremental annual fixed manufacturing costs = $400,000

Variable selling and distribution costs = $1 per unit

Annual fixed selling and distribution costs = $220,000

Selling and distribution costs same whether manufactured or imported

Relevant costs:

a) In-house manufacturing:

Variable manufacturing costs =  $4.75

Incremental annual fixed costs = 0.50 ($400,000/800,000)

Total relevant in-house costs =  $5.25

b) Outsourced:

Price by Taiwanese company = $5.00