Question

Current cost to source from the home plant to Country A is $0.55 per unit, plus $0.02 in shipping (there is no tariff). If product is sourced from Country B, manufacturing cost is expected to be 20% lower; but shipping will increase to $0.06, and there is a tariff of 15% on CIF. What will the savings be on 100 million units if sourcing for Country A switches from the home plant to Country B

Answer 1

Answer:

Cost savings in sourcing from Country A = $0.5 million ($57.5 - $57 million)

Explanation:

Sourcing from Country A:

Purchase price = $0.55 per unit

Shipping = $0.02

Total Cost = $0.57

Cost of 100 million units = $57 million

Sourcing from Country B:

Purchasing price = $0.44 ($0.55 x 80%)

Shipping = $0.06

CIF Tariff = 15% = $0.075  ($0.5 x 15%)

Total Cost = $0.575

Cost of 100 million units = $57.5 million

Sourcing from Country A is more beneficial than sourcing from Country B with reduced product cost, but increased shipping and additional tariff.  Whereas Country A gives a total cost for 100 million units of $57 million, sourcing the same units from Country B gives a total cost of $57.5 million.  The savings of $0.5 million is substantial that no company would like to lose unless the goods from Country B are of higher quality than those from Country A.