Seagull Controls Limited

403 Words2 Pages
Goal Definition: Advise Management on the various options regarding the outsourcing contract and the decision to proceed with JAFAR contract. Quantitative Analysis: • Exhibit 1 shows the effects of the external procurement of CTR1 units. Accepting the outsourcing contract was overall unfavorable to Seagull as it is costing the company $600K per year. • Exhibit 2 shows the net income effect if the outsourcing contract is cancelled or modified. Reducing the order to 2 000 units is the most financially favorable option for the company as a whole. • Exhibit 3 shows the JAFAR project has a positive NPV for the entire duration and up to 2 years after the end of the project. This provides sufficient time to find another contract that uses the expanded capacity. • Exhibit 4 shows a cost of $240 per CTR1 unit when using a modified direct costing method, which is lower than the $210 Market price. Qualitative Analysis • If the outsourcing contract is maintained, the Component Division wouldn’t work as a cost center which does not follow the Company’s mission. • CTR1 units being core components of the PCU, relying on an external supplier would damage Seagull’s competitive advantage. • The expanded capacity for the JAFAR contract supports the company’s growth objective. • The addition of a third shift may present challenges that can be overcome in the short-run but not on the long run (such as maintenance, breakage, rest, interruption and holidays). • Current performance metrics lead the Component division to inflate transfer prices. • The lack of communication among the management team has contributed to the existing conflict as well as an overall reduced net income for Seagull. Recommendations: • Based on Seagull’s overall net income the Device division should modify the external contract to reduce the order to 2 000 units. • Performance metrics for the

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