What questions should managers answer when considering outsourcing?
When considering outsourcing, the manager must consider some important questions such as cost-saving, quality, the deadline to deliver the product, impact on sales revenue, and many more.
The term management refers to the authority of a business entity responsible for managing and controlling the activities and operations of the business and its human assets. Lower, middle and upper levels are some levels of management of an organization.
A manager must answer the following questions when considering the outsourcing:
Each morning, Max Smith stocks the drink case at Max’s Beach Hut in Myrtle Beach, South Carolina. The drink case has 120 linear feet of refrigerated drink space. Each linear foot can hold either six 12-ounce cans or three 20-ounce bottles.
Max’s Beach Hut sells three types of cold drinks:
1. Licious-Ade in 12-oz. cans for $1.40 per can
2. Licious-Ade in 20-oz. bottles for $1.90 per bottle
3. Pep-Cola in 20-oz. bottles for $2.20 per bottle
Max’s Beach Hut pays its suppliers:
1. $0.20 per 12-oz. can of Licious-Ade
2. $0.35 per 20-oz. bottle of Licious-Ade
3. $0.55 per 20-oz. bottle of Pep-Cola
Max’s Beach Hut’s monthly fixed costs include:
Hut rental $355
Refrigerator rental 65
Max’s salary 1,700
Total fixed costs $2,120
Max’s Beach Hut can sell all the drinks stocked in the display case each morning.
1. What is Max’s Beach Hut’s constraining factor? What should Max stock to maximize profits?
2. Suppose Max’s Beach Hut refuses to devote more than 80 linear feet to any individual product. Under this condition, how many linear feet of each drink should Max’s stock? How many units of each product will be available for sale each day?
Tread Light produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Tread Light could use all its available machine hours to produce either model. The two models are processed through the same production departments. Data for both models are as follows:
Sales price $1,030 $610
Direct materials 320 130
Direct labor 88 180
Variable manufacturing overhead 270 90
Fixed manufacturing overhead* 102 34
Variable operating expenses 121 63
Total costs 901 497
Operating income $129 $113
*allocated on the basis of machine hours
1. What is the constraint?
2. Which model should Tread Light produce? (Hint: Use the allocation of fixed manufacturing overhead to determine the proportion of machine hours used by each product.)
3. If Tread Light should produce both models, compute the mix that will maximize operating income.
Priscilla Smiley manages a fleet of 250 delivery trucks for Daniels Corporation. Smiley must decide whether the company should outsource the fleet management function. If she outsources to Fleet Management Services (FMS), FMS will be responsible for maintenance and scheduling activities. This alternative would require Smiley to lay off her five employees. However, her own job would be secure; she would be Daniels’s liaison with FMS. If she continues to manage the fleet, she will need fleet management software that costs $9,500 per year to lease. FMS offers to manage this fleet for an annual fee of $300,000. Smiley performed the following analysis:
Retain in-house Outsource to FMS Difference
Annual leasing fee for $9,500 $9,500
Annual maintenance of
Trucks 147,000 147,000
Total annual salaries of
Five laid-off employees 185,000 185,000
Service’s annual fee $300,000 (300,000)
Total differential cost of
Outsourcing $341,500 $300,000 $41,500
1. Which alternative will maximize Daniels’s short-term operating income?
2. What qualitative factors should Daniels consider before making a final decision?
Grimm Company makes decorative wedding cakes. The company is considering buying the cakes rather than baking them, which will allow it to concentrate on decorating. The company averages 100 wedding cakes per year and incurs the following costs from baking wedding cakes:
Direct materials $500
Direct labor 1,000
Variable manufacturing overhead 200
Fixed manufacturing overhead 1,200
Total manufacturing cost $2,900
Number of cakes ÷ 100
Cost per cake $29
Fixed costs are primarily the depreciation on kitchen equipment such as ovens and mixers. Grimm expects to retain the equipment. Grimm can buy the cakes for $25.
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