One of your Taiwanese suppliers has bid on a new line of moldedplastic parts that is currently being assembled at your plant. Thesupplier has bid $0.10 per part, given a forecast you provided of200,000 parts in year 1; 400,000 in year 2; and 500,000 in year 3.Shipping and handling of parts from the supplier’s factory isestimated at $0.03 per unit. Additional inventory handling chargesshould amount to $0.005 per unit. Finally, administrative costs areestimated at $30 per month.

Although your plant is able to continue producing the part, theplant would need to invest in another molding machine, which wouldcost $20,000. Direct materials can be purchased for $0.06 per unit.Direct labor is estimated at $0.05 per unit for wages plus a 50percent surcharge for benefits and, indirect labor is estimated at$0.009 per unit plus 50 percent benefits. Up-front engineering anddesign costs will amount to $30,000. Finally, management hasinsisted that overhead be allocated if the parts are made in-houseat a rate of 100 percent of direct labor wage costs. The firm usesa cost of capital of 15 percent per year.

a. Calculate the difference in NPVs between the Make and Buyoptions. Express all costs as positive values in your calculations.It is suggested to use the NPV function in Excel. (Do not roundintermediate calculations. Round your answer to 2 decimalplaces.)

(Difference in NPV $

b. Should you continue to produce in-house or accept the bidfrom your Taiwanese supplier?