Lightwheel Products, LLC manufactures motion sensors. They have been in business for slightly over four years and currently manufacture just one sensor. When they started, sales were about 5,000 units per month.
Currently, they are running at about 25,000 sensors per month. Their business model has been to source all of the raw materials and do all of the manufacturing in house. In their strategic planning sessions, they have adopted a goal of adding different varieties of sensors.
They currently operate out of a 25,000-square foot plant. If they wish to expand, they need an additional 25,000 square feet to produce in house. Here are some other facts to consider:
1. Land is a scarce resource in your target market. Prices have doubled since you last purchased land 3 years ago.
2. Land near your existing plant is difficult to find.
3. Production levels have been good and have kept up with increasing demand.
4. Quality complaints from customers have gone from .2% in prior years to a current level of .5%.
5. Plant employees have been grumbling about the workload and their rate of pay.
6. Supervisors believe plant employees are wasting time - extended breaks, a lot of chit chat and down time. However, they are in a tight labor market and have been hesitant to enforce company policies regarding this behavior.
7. The department heads had this to say about a potential expansion:
a. Marketing Manager: Bullish on growth and believes the company should expand. Forecasts heavy demand for new lines of sensors.
b. Finance Manager: Expansion will result in economies of scale, increasing profits.
c. Operations Manager: Has concerns about workforce availability and quality controls.
8. The planning group started talking about outsourcing. The President asked the group to put together a proposal for manufacturing in house versus outsourcing.
9. The team has gathered the following information to assist with this decision:
Producing in House Cost Annual
Increases
One additional Supervisor - annual salary $60,000 5%
Cost of additional facilities per year $1,000,000
Variable costs per unit:
Direct Labor $ 4.00 3%
Direct Materials $14.00 2%
Utilities $ 2.00 1%
Indirect Labor $ 2.00 3%
The sensors will sell for $45 per unit in 2018. Projections assume the sales price will increase by 2% per year. The marketing manager has projected sales (in units) of the new sensors for the next five years as follows:
|
2018
|
2019
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2020
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2021
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2022
|
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300,000
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500,000
|
700,000
|
900,000
|
1,000,000
|
The costs of outsourcing are as follows:
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Item
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Cost
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Annual Increases
|
|
Cost of units:
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$20.00
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10%
|
|
Transportation per unit:
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$2.00
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$0.20
|
|
Inventory carrying costs per unit:
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5% of the unit cost
|
|
The President of the company would like the following questions answered?
1. Should Lightwheel manufacture the new sensors in house or buy them from a supplier?
2. Does the decision remain the same during the five year period?
3. What else, other than costs, should be considered when making this decision?