Question: Study the Maine-Barnes Ltd. Case attached. Discuss the following factors in relation to the make-buy decision

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Question:
Study the Maine-Barnes Ltd. Case attached. Discuss the
following factors in relation to the make-buy decision in this
case:
1) Capacity
considerations,
2)
manufacturing jobs and work-force stability for
Maine-Barnes,
3) design
secrecy,
4) control of
quality,
5) control of
delivery performance,
6) management
control of costs, and
7) the cost
of make vs. buy.
Maine-Barnes was a successful small firm that had carved out a
profitable niche in the electronic
office products field. A proposed new line of sophisticated
professional calculators currently
posed some manufacturing problems for the firm because of
limited shop capacity. Josh Purdy,
the firm’s supply management director, was asked to investigate
the possibility of subcontracting
one of the components to an outside source—and then to prepare a
make-or-buy recommendation
for the general manager.
Maine-Barnes was located near Boston in the heart of a high-tech
manufacturing
community. The firm’s success was due primarily to its ability
to produce high-quality specialty
products designed for particular professional uses by engineers,
architects, medical researchers,
financial analysts, and so on. Product technology in the field
was undergoing continual change.
As a result, product prices had dropped markedly during the past
two years, and competition in
the market was keen and fast paced.
The proposed line of new calculators was designed to be highly
price competitive.
Consequently, a permanent rechargeable battery powered the
units. This meant that each unit was
sold with a small plug-in recharging unit. Although the
recharger increased the initial cost of the
unit somewhat, the user realized significant operating cost
savings during the life of the product.
In addition to an attractive life cycle cost, Maine-Barnes was
banking on several unique
proprietary design features of the calculator and the recharging
unit to generate a high demand for
the new product line. Unfortunately, the new design features
were not patentable.
Despite the general manager’s optimistic views for the new
product line, the marketing
manager was unable to forecast demand for the new units with
what he considered to be a
comfortable level of accuracy. Because of competition and
rapidly changing technology in the
industry, he was not willing to forecast first-year sales of
more than 50,000 units. If the line was
well received, he estimated that approximately 100,000 units
could be sold in each of the two
succeeding years.
Maine-Barnes had grown steadily during the past five years and
was now operating near
its manufacturing capacity. The shop manager cautioned that
addition of the new calculator line
would stretch the operation to its limit. In fact, further
analysis revealed that the shop could
handle no more than 75,000 new calculator units per year—and
this was without producing the
companion recharger units. If Maine-Barnes were to produce the
recharger units too, it would
have to invest approximately $84,000 in new equipment. The life
of the equipment would be
approximately twelve years. For tax purposes, however, the
Internal Revenue Service would
permit it to be depreciated over a seven-year period.
As a result of the preceding analysis, Josh Purdy requested bids
from three former
suppliers for the new recharger unit. All three were known to be
competent and reliable; their
bids are summarized below.
BIDS ON THE RECHARGER UNIT
($ per unit)
Purchase qty. Eastern Mfg. Boston
Electrical D & A
Mfg.
50,000

$8.15

$7.45

$7.82
75,000

7.68

7.12

7.45
100,000
7.06

6.79

7.10
In response to Josh’s inquiry, all three firms indicated an
interest in discussing the possibility of a
three-year, single-source contract. All were willing to discuss
bid prices further if a three-year
deal could be worked out.
After reviewing the bid figures, Josh discussed the possibility
of making the recharger inhouse
with the shop manager and the firm’s chief cost accountant.
Several days later, Josh
received the following estimated cost data from the controller’s
office.
In-house unit costs to make the recharger
Direct labor

$1.50
Materials

3.00
Factory overhead (110% direct labor) 1.65
Factory cost

6.15
General administrative and selling
expense (10% factory cost)

.62
$6.77 per unit
Notes:
1. Materials cost includes a 20 percent internal material
handing cost.
2. Factory overhead is estimated to be 35 percent variable and
65 percent fixed.
After studying the cost estimate, Josh was not certain that it
was complete. For example, he
wondered why an allowance of 15 percent had been made for scrap
material but none for labor.
He was also puzzled about the overhead figures. The controller
indicated that there would be no
reduction in overhead if the new equipment was purchased—and
that the amortization of the new
equipment would constitute an additional expense.
Josh was also aware that the firm’s labor contract expired in
several months. In the past,
subcontracting work to outside suppliers had always been a
sensitive issue with the union,
although wage rates seemed to be particularly important this
year.