Relevant Information for Decision Making

Behemoth Motors Corp. (BMC) is a major manufacturer of automobiles in the United States. BMC has decided
to include a Global Positioning System navigator (GPSN) in all of its Sports Utility Vehicles (SUV) beginning
with the 2016 model year. These models are just now being delivered and the GPSN units are manufactured in
the Detroit BMC facility. Currently and for the foreseeable future, BMC will need 8,000 GPSNs per month. The
total manufacturing cost of the GSPN is $425 per unit calculated as follows:
See attachment for chart:
BMC experiences a high level of quality control over these units with only 2% of total production failing quality
control testing. 98% of all units manufactured are installed in SUVs.
Wally Wizard, the GPSN manager, has been approached by Far East Enterprises, Ltd (FEE) who has offered to
outsource these units for MBC. FEE is a three year old electronic manufacturing company located in China and
has experienced outstanding growth during that three year period. FEE has offered to manufacture and deliver to
Detroit 8,000 GPSN units at a unit cost of $400 beginning on Jan. 1, 2016. FEE asks for a two year contract.
Under the existing arrangement, the direct materials are all purchased locally under month to month contracts.
There are no future obligations under these contracts.
There are 100 direct labor employees involved in this process. These employees can be laid off but if they are,
BMC must pay a penalty of $66,000 per year to the employees union. This penalty will continue for 4 years.
There are 10 supervisors, each earning $6,000 per month, assigned to the project. If the product is outsourced,
all of these supervisors can be assigned to other supervisory positions within BMC.
If the product is outsourced, half of the factory floor space can be used for storage for materials that are
currently stored in rented storage facilities. These rented facilities currently cost BMC $5,000 per month. There
is no alternative use for the remaining factory floor space. The current $2.50 per sq. ft. charge is based on the
overall BMC factory costs.
General company overhead is first assigned to operating units on the basis of total product produced and then
further to produced units on a per unit basis. If the product is outsourced, this overhead will be reassigned to
other operating divisions although total corporate overhead incurred will remain unchanged.
You have determined the following additional facts. The units manufactured by FEE will have the same quality
as those manufactured by BMC and the delivery schedule will have the same reliability as that of BMC.
Case Assignment
Make a recommendation to Wally Wizard in a 3 to 4 page paper. Be sure to support your recommendation with
the decision making process outlined in the background information.
Assignment Expectations
It is important to answer the questions above. The discussion should be three to four pages and written in a clear
and concise manner. Support your discussion with references in APA format. You are encouraged to use Excel
or other compatible spreadsheet when computations are involved.