Question

Labor Costs and Productivity -

(A) You are thinking about relocating your washing machine manufacturing facility from St. Louis, Missouri to Jakarta, Indonesia. Your U.S. workers earn $20 per hour and their average productivity is 10 washing machines per hour. You estimate that your workers in Indonesia would earn $3.90 per hour and will be able to produce 2 machines per hour. You typically sell about 300,000 machines per year. Your market is entirely in the U.S. and you don't think there will be a substantial market in Indonesia anytime in the foreseeable future. Should you move your facility? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Answer 1

Answer A)

This is based on labor productivity concept ,

Cost of production St. Louis, Missouri = $ 20/10 = $ 2/ machine

Cost of production at new facility Jakarta, Indonesia = $ 3.90/2 = $ 1.95 / machine

Saving per machine at new new place = 2 -1.95 = $ 0.05 /machine

annual demand = 300,000 units

Annual total saving = 300000 * 0.05 =$ 15,000

As there is no market for produced machine in Indonesia , the company has to sell all produced machine in USA market which require a transportation cost , although the transporation cost data is not given in the question but defenetely higher than $ 0.05/machine .

So, we shouldnot move our facility of production in this condition .