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The piston work cells account for 25% of the factory's floor space, 28% of total direct labor hours, and 23% of plant volume. From this analysis, the team has decided to allocate 25% of the factory's overhead and administrative costs to the piston work cells for the analysis that includes these costs. Exhibit 3 presents relevant cost data for the previous year. The team expects these costs to increase 3% each year.
Exhibit 3 Total Factory Overhead and Administrative Costs
| | |
| |Previous Year Expense/Cost |
|Cost Category | |
| | |
|Administrative staff |$1,200,000 |
| | |
|Staff engineering |$900,000 |
| | |
|Taxes |$120,000 …show more content…
In many respects, outsourcing is an exercise in supplier evaluation and selection. Insourcing/outsourcing requires the evaluation of several suppliers in depth—the internal supplier (FlexCon) and external suppliers (in the marketplace). The supplier that the team favors if FlexCon outsources the pistons quoted an average unit price of $12.20 per piston (recall that this outsourcing decision involves different piston part numbers). The team believes that negotiation will occur if FlexCon elects to outsource, perhaps resulting in a lower quoted price. Since the team does not yet know the final negotiated price, some members argued that several outsourcing analyses are required to reflect different possible unit prices. Quoted terms are 2/10, net 30. The supplier says it will maintain the negotiated price over the next two …show more content…
This results in an inventory carrying charge, which the team must calculate and include in the total cost analysis. While FlexCon likely will rely on or draw down safety stock levels during the next two years, for purposes of costing the inventory the team has decided not to estimate when this might occur. Inventory carrying charges include working capital committed to financing the inventory, plus charges for material handling, warehousing, insurance and taxes, and risk of obsolescence and damage. FlexCon's inventory carrying charge is 18%
Exhibit 3 Total Factory Overhead and Administrative Costs
| | |
| |Previous Year Expense/Cost |
|Cost Category | |
| | |
|Administrative staff |$1,200,000 |
| | |
|Staff engineering |$900,000 |
| | |
|Taxes |$120,000 …show more content…
In many respects, outsourcing is an exercise in supplier evaluation and selection. Insourcing/outsourcing requires the evaluation of several suppliers in depth—the internal supplier (FlexCon) and external suppliers (in the marketplace). The supplier that the team favors if FlexCon outsources the pistons quoted an average unit price of $12.20 per piston (recall that this outsourcing decision involves different piston part numbers). The team believes that negotiation will occur if FlexCon elects to outsource, perhaps resulting in a lower quoted price. Since the team does not yet know the final negotiated price, some members argued that several outsourcing analyses are required to reflect different possible unit prices. Quoted terms are 2/10, net 30. The supplier says it will maintain the negotiated price over the next two …show more content…
This results in an inventory carrying charge, which the team must calculate and include in the total cost analysis. While FlexCon likely will rely on or draw down safety stock levels during the next two years, for purposes of costing the inventory the team has decided not to estimate when this might occur. Inventory carrying charges include working capital committed to financing the inventory, plus charges for material handling, warehousing, insurance and taxes, and risk of obsolescence and damage. FlexCon's inventory carrying charge is 18%