QuestionP1 – 8
P1-8: Montana Pen Company
Montanapen should not outsource 400 gold clips for pen no. 872 to theChinese firm, this is because:
Withthe current production of 1200 clips per month and cost per unit of185 baht, the company will fetch total cost of 222000 baht.
i.e.1200 clips * 185 baht = 222000 baht
Uponoutsourcing and the production capacity falls to 800 clips and thecost per unit rises to 212.5. Total cost, therefore, will be
800clips * 212.5 baht = 170000 baht
Onoutsourcing 400 clips to the Chinese firm cost per unit will beestimated as
Differencein cost per unit = 222000 – 170000 = 52000 baht
Thereforecost to produce 400 clips = 52000/400units = 130 baht
Outsourcingfirm Total cost = 400 clips * 136 baht = 54400 baht
Beingsome form of a contract, Montana Pen Co. will be required to pay54400 baht to the Chinese company while it acquires 52000 baht.Montana will be entitled to a loss of 54400 – 52000 = 2400 bahthence, the Montana firm should not accept the Chinese offer.
Additionalinformation to seek before deciding to outsource 400 clips to theChinese firm.
Quality – The quality of the products need to be adequately described to ensure that parties concerned are in agreement (Sollish & Semanik, 2011). The Chinese company offers to produce the clips for 136 baht. The low pricing for the production cost may prompt Montana to question whether the company will deliver the same quality or good quality products.
Profitability concerns – To transact in a universal platform, businesses are reassured high profits (Sollish & Semanik, 2011). The Chinese firm is in a foreign market. There may be concerns as to whether Montana Company will be able to derive desirable profits from the outsourcing terms.
Benefits derived – Expansion to global markets is meant to improve business and international relationships (Sollish & Semanik, 2011). For the two firms to engage in business, it will constitute to better working relationships to warrant future growth.
Sollish,F., & Semanik, J. (2011). Strategicglobal sourcing best practices.Hoboken, N.J: Wiley.