ABC circuits is trying to decide whether to shift production overseas of its rel
ID: 2561819 • Letter: A
Question
ABC circuits is trying to decide whether to shift production overseas of its relatively expensive integrated circuits (they average aruond $110 each). Offshore assembly would save about $4.47 per chip in labour costs. But by producing offshore, it would take about four weeks to get the parts to customers, in contrast to one week with domestic manufacturing. Thus, offshore production would force ABC to carry another three weeks of inventory. In addition, offshore production would entail combined shipping and customs duty costs of $2.55 per chip. Suppose ABC's cost of funds is 12 percent. Will it save money by shifting production offshore?
Explanation / Answer
Yes,it will save $1.16 per chip by shifting production to offshore
**Number of weeks in a year 52
Saving 4.47 less: shipping and custom duty -2.55 Incremental carrying cost for 3 weeks [110*.12*3/52] -.76 Net benefit /(disadvantage) 1.16