More challenges, more analysis!

Samba Sneakers

You are learning that there’s always
a new challenge that needs your analysis and attention. You returned from a
quick lunch to find another e-mail waiting for you from Cynthia Crowninshield.

E-mail

From: Cynthia Crowninshield
Re: Your help on Samba Sneakers

Just heard from marketing that it’s
a green light for production of Samba Sneakers. These brightly-colored sneakers
will be aimed at teens and pre-teens and have colorized rubber soles.

Here’s the problem. We can’t move
forward unless we are confident we can produce the sneakers cost-effectively.

As I see it, we have three options:

路
Recondition the existing equipment at the Shanghai facility

路
Buy new equipment for the Shanghai facility

路
Outsource production to a vendor in China

What we need from you is to identify
which option makes sense based on the range of production.

Expect an e-mail from Alistair Wu
with information about the machinery options, and one from Angela Down about
the outsourcing. By the way, please don’t mention to Alistair that we are
considering outsourcing–he’s touchy about any production that isn’t in-house.

All best,

C.C.

Sent from my Verizon Wireless
BlackBerry

You have barely had time to digest
Cynthia’s e-mail when you hear the tone indicating that you have a new message.
You open it and discover it is from Alistair Wu:

E-mail

From: Alistair Wu
Re: Sneaker production

We’re excited about Samba Sneakers!

Per Ms. Crowninshield’s request, here’s
what we can tell you about the situation.

We estimate that there will be a
fixed cost of $50,000 to recondition our existing equipment and then a variable
cost of $1,000 for every 1,000 sneakers produced.

Buying new equipment will have a
fixed cost of $200,000 and then a variable cost of $500 for every 1,000
sneakers produced.

Eager to get production going
whichever option we choose!

Regards,

Alistair Wu

Director, Shuzworld China Production

You don’t get a message from Angela
Down of Accounting until the following morning outlining the outsourcing
option.

E-mail

From: Angela Down
Re: Outsourcing Samba Sneaker production

Cynthia asked me to send you the
outsourcing estimate we have.

We anticipate no initial investment
(and no fixed costs) if we outsource. The vendor estimates a (variable) cost of
$3,000 for every 1,000 sneakers produced.

Hope this is what you are looking
for!

Angela

You print the two e-mails and sit
down to begin your analysis of the three options facing