A large global automobile manufacturer is considering outsourcing the manufacturing of a solenoid used in the transmission of its SUVs. The company estimates that annual fixed costs of manufacturing the part in-house, which include equipment, maintenance, and manage-ment, amounts to $6 million. The variable costs of labor and material are $5.00 per unit. The company has an offer from a major subcontractor to produce the part for $8.00 per unit. However, the subcontractor wants the company to share in the costs of the equipment. The automobile company estimates that the total cost would be $4 million, which also includes management oversight for the new supply contact Required:
a. How many solenoids would the automobile company need per year to make theâ in-house option leastâcostly?
b. What otherâ factors, besidesâ costs, should the automobile company consider before revising its supply chain forâ SUVs?

A) The company must consume more than 666667 solenoids per year to make the in-house option least costly.

B) - quality of the product

- prompt delivery of products

- good communication & relationship with external parties.

Explanation:

A) Since if they use a subcontractor, they will share part of the equipment cost, Let the cross over point for manufacturing the solenoid in house and using a contractor be denoted as x.

Now, variable costs of labor and material are $5.00 per unit. This is 5x

Also from the subcontractor, production of the part is estimated at $8.00 per unit. This is 8x.

Thus;

6000000 + 5x = 4000000 + 8x

Rearranging, we have;

6000000 - 4000000 = 8x - 5x

3x = 2000000

x = 2000000/3

x ≈ 666667

Thus, the company must consume more than 666667 solenoids per year to make the in-house option least costly.

B) Apart from cost, other factors the company must consider are quality of the product, prompt delivery of products, good communication & relationship with stakeholders involved.