A.Gamma Ltd. is trying to decide whether to shift production overseas of a component which averages $12 per piece in costs. Offshore assembly would save about 12.6 cents per chip in labor costs, but would take about five weeks to get the parts to customers, in contrast to one week with domestic manufacturing. Thus, offshore production would force Gamma to carry another four weeks of inventory. In addition, offshore production would entail combined shipping and customs duty costs of 3 cents. Gamma’s cost of capital is 15%. ……. ….
1. What would be the added per-piece inventory related interest expense due to overseas production?
2.What is the per-piece net benefit of shifting production offshore?
3.Should they offshore production?
B. Toyota is considering locating a factory in a foreign country where they have a major market — the United States. Although labor costs would rise by ¥27,000 per car, the time in transit for the cars (to be sold in the United States) would be reduced by 65 days. The cars sell for ¥795,000, and Toyota’s cost of capital is 15%.
1. By what amount will their cost per car change?
2. Should they locate the factory in the US? ……. ….