While there will be a favorable amount of savings for Mowerson in the year 2002, Jim Wright should have analyzed the potential savings or losses that Mowerson would experience over a five-year period, at least. This is because the hiring and firing of certain individuals may affect the firm’s production over time. With an increase in production, it is possible that the savings could be even higher. However, with an annual loss of 40 assembly department technicians, there could be a dip in production that results in a loss of revenue. Meaning that the annual savings could steadily decrease instead of increase.
First, the savings associated with these potential savings should be analyzed. The 1st variable, which is the amount of savings associated with the cutting of 40 different assembly technicians, is correct. The 2nd variable, which is the savings experienced after transferring an assembly supervisor is correct as well. It is assumed that the $35,000 amount includes the assembly supervisor’s moving expenses along with their expected salary. The 3rd variable, which is the expected amount of savings that will arise from a reduced amount of floor space being used seem to be correct as well.
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The 4th variable, which is the expected savings from only using a purchasing clerk ½ time are correct. The 5th variable, the expected amount of savings from reducing the amount of purchased orders is correct. Since Tri-Star will be the exclusive provider of the boards, it makes sense that a reduced number of order for materials, parts, new equipment, etc. would be included in the group of potential savings. When looking at the incoming freight costs in Jim Wright’s analysis, there seems to be a mistake in the actual costs of this variable. With this mistake, it is unclear how the 6th variable $7500 incoming freight cost was calculated in the first place, as this means that shipping costs should be somewhere in the millions if this is on a per board basis.
Next, the costs associated with contracting Tri-Star’s services should be objectively evaluated. The 7th variable on the costs and savings chart, which is the increased production cost, is correct. It should be noted that the amount listed is the difference between the original cost and the newer cost. This number is $800,000, which fits with the assumption that board production costs should be close to the millions. The 8th and 9th variables on the chart, which is the hiring of one junior engineer and quality control inspector apiece is correct. As the numbers listed are probably the expected starting salaries of these new hires. Finally, the 10th variable of the cost and savings chart, the increased amount of storage costs for each unit is correct. The costs for this variable was calculated at $2 per unit with an expected 4200 units needing to be stored. All in all, entering into a business relationship with Tri-Star should result in a savings surplus of $398,100, which is a favorable possibility for Mowerson to consider.
Additional information about Tri-Star that would be helpful in evaluating this manufacturing decision is the amount of insurance and compensation that the Tri-Star affiliated technicians may need from Mowerson. While Mowerson will be cutting in-house staff costs, there is still the issue of Tri-Star affiliated technicians being hurt on Mowerson property. If these workers are working off-site, then the potential costs of an unsatisfied client due to late deliveries should be considered. Finally, the type of materials that Tri-Star uses should be considered. Faulty boards due to subpar materials will cost Mowerson more in the long-term due to warranties and refunds.
