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United Metal

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Submitted By kristen03
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Based on our NPV analysis of the Buy and Make scenarios that United Metal has the opportunity to choose between, we recommend that United Metal decide to continue manufacturing their components. We made this choice based on the following additional assumptions other than the ones already mentioned: * We determined that the cost per piece for United Metal is closer to £0.96 per piece based on the manufacturing cost, raw materials, and machinery over 8 years (without the warehouse extension). * Because this contract is based off one year renewals, we made the assumption that the agreed on price at £0.83 per piece is the same contract price over the next 8 years, with no decrease in price. * We also assumed that Amalgamated would not repurchase the machinery they would sell, but that United Metal would sell the machine at t=0 for the £5000 if they chose to go with the Buy scenario. * We also decided that the incremental cost of increasing the operations manager salary, although it was not a deciding factor, was still a contributing factor to our decision as a part of the opportunity cost. * The warehouse capacity is an additional 10% every year. We used this to help determine when we would need to invest in the warehouse extension.
In our NPV analysis, we had to determine when we would need to invest in the warehouse extension. In the Make scenario, we already decided that we would reach capacity by Year 4. In the Buy scenario, we decided that we would reach 100% capacity by Year 3 (see Exhibit 1), and therefore need to invest at the end of year 3. As stated in one of our assumptions, United Metal would choose to sell the 1 year old machine for £5000 if they decided to go with the Buy scenario. This choice eliminated any future capital allowance/ depreciation tax shield benefit United Metal would have received if they were to keep the machine. Also, in the Buy scenario, because they would have to increase how much inventory they would have on hand in the warehouse, they would have to invest in the warehouse extension earlier than if they were to continue keeping 2 weeks of inventory on hand.
We decided to continue manufacturing because this had the higher NPV, based on our assumptions. The capital allowance/ depreciation tax shield benefit, the initial increase in inventory, and earlier investment of the warehouse extension is what solidifies our choice to continue manufacturing and not buy from Amalgamated Components, despite the lower cost.

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