91Ó°ÊÓ

Braided Rugs, Inc., is considering three possible countries for the sole manufacturing site of its newest area rug: Italy, Portugal, and Thailand. All area rugs are to be sold to retail outlets in the United States for \(\$ 250\) per unit. These retail outlets add their own markup when selling to final customers. Fixed costs and variable cost per unit (area rug) differ in the three countries. $$\begin{array}{lcccc} & & \text { Variable } & \text { Variable } \\\& \text { Sales Price } & \text { Annual } & \text { Manufacturing } & \text { Marketing \& } \\\\\text { to Retail } & \text { Fixed } & \text { cost per } & \text { Distribution cost } \\\\\text { Country } & \text { Outlets } & \text { costs } & \text { Area Rug } & \text { per Area Rug } \\\\\hline \text { Portugal } & \$ 250.00 & \$ 7,500,000 & \$ 45.00 & \$ 10.00 \\\\\text { Italy } & 250.00 & 5,000,000 & 65.00 & 15.00 \\\\\text { Thailand } & 250.00 & 9,000,000 & 55.00 & 20.00\end{array}$$

Step by step solution

01

Understand the given information

The given table provides us with: 1. Sales price to retail outlets: \$250 per rug (constant for all countries) 2. Annual fixed costs for each country: Portugal (\$7,500,000), Italy (\$5,000,000), and Thailand (\$9,000,000) 3. Variable manufacturing cost per rug: Portugal (\$45), Italy (\$65), and Thailand (\$55) 4. Variable marketing & distribution cost per rug: Portugal (\$10), Italy (\$15), and Thailand (\$20) Our goal is to analyze this data to determine the best country for the manufacturing site.

02

Calculate total variable cost per rug for each country

For each country, add the manufacturing cost and marketing & distribution cost. Total Variable Cost for Portugal per rug: \(45 + 10 = \$55\) Total Variable Cost for Italy per rug: \(65 + 15 = \$80\) Total Variable Cost for Thailand per rug: \(55 + 20 = \$75\)

03

Calculate break-even point for each country

To calculate the break-even point for each country, we use the following formula: Break-even point (in units) = \(\frac{Fixed\, Costs}{(Sales\, Price - Total\, Variable\, Cost)}\) For Portugal: Break-even point = \(\frac{7{,}500{,}000}{(250 - 55)} = \frac{7{,}500{,}000}{195} = 38{,}462\) For Italy: Break-even point = \(\frac{5{,}000{,}000}{(250 - 80)} = \frac{5{,}000{,}000}{170} = 29{,}412\) For Thailand: Break-even point = \(\frac{9{,}000{,}000}{(250 - 75)} = \frac{9{,}000{,}000}{175} = 51{,}429\)

04

Analyze break-even points and make a decision

Now that we have the break-even points for each country, we can analyze which option is the most favorable. Portugal: 38,462 rugs need to be sold in a year to cover all costs Italy: 29,412 rugs need to be sold in a year to cover all costs Thailand: 51,429 rugs need to be sold in a year to cover all costs Based on the break-even points, Italy would seem to be the best option, as fewer rugs need to be sold to cover all costs. However, it is also important to consider factors such as the future growth potential, quality, and other factors that would impact the business in each country before making a final decision.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Variable Costs

Variable costs are expenses that change in proportion to the production output of a company. For Braided Rugs, Inc., these costs include the variable manufacturing cost and the marketing & distribution cost per rug. In our exercise, for each country, these costs differ:

• Portugal has a manufacturing cost of $45 and a marketing & distribution cost of $10 per rug, totaling $55.
• Italy has a manufacturing cost of $65 and a marketing & distribution cost of $15 per rug, totaling $80.
• Thailand has a manufacturing cost of $55 and a marketing & distribution cost of $20 per rug, totaling $75.

Understanding these costs is crucial because they directly affect the profit margins on each rug sold. The overall variable cost impacts how much profit a country can generate after covering costs. The lower the variable cost, the lower the sales required to achieve break-even, making it a critical factor in the manufacturing decision.

Fixed Costs

Fixed costs are costs that remain constant regardless of the production volume. They include expenses like rent, salaries, and machinery, which your company incurs regardless of how much you produce.

• Portugal's fixed costs are $7,500,000 annually.
• Italy's fixed costs are $5,000,000 annually.
• Thailand's fixed costs are $9,000,000 annually.

Fixed costs are significant in determining the break-even point; the lower these costs, the fewer units a company must sell to cover them. Understanding fixed costs is essential when making international manufacturing decisions because they will influence the profitability and competitiveness of the business in each location. Choosing a location with lower fixed costs can result in faster financial viability and higher returns.

Manufacturing Cost Analysis

Manufacturing cost analysis involves assessing all costs related to producing a product. In this scenario, Braided Rugs, Inc. must evaluate the trade-off between fixed costs and variable costs. To find the ideal manufacturing site, the company calculates the break-even point for each potential country, which shows us how many units need to be sold to cover all expenses. This analysis is essential for identifying the most financially favorable option:

• Portugal requires the sale of 38,462 rugs to break even.
• Italy requires 29,412 rugs to break even.
• Thailand requires 51,429 rugs to break even.

By comparing these numbers, Italy stands out as requiring the lowest number of unit sales to break even, making it a potentially more viable choice. However, this analysis must also consider qualitative factors such as workforce skill levels, supply chain logistics, and political stability, which can affect long-term business sustainability.

International Manufacturing Decisions

Deciding the location for international manufacturing involves analyzing several factors beyond just costs. Braided Rugs, Inc. needs to look at break-even points, but must also weigh other critical factors:

• Future growth potential: How well might the business grow in each country?
• Quality control: Are the skills and processes in place to ensure consistent quality?
• Regulatory environment: What are the local regulations and how will they affect operations?
• Logistics: Can the rugs be transported efficiently to the U.S. market?

Such strategic decisions require a holistic view. While Italy seems the best option based on the break-even analysis alone, other factors could tip the balance. Manufacturing decisions in an international context should align with long-term objectives, not just immediate financial calculations. Therefore, conducting comprehensive due diligence is key to making informed and profitable choices in global manufacturing.