Memo

Having been asked to recommend which method of production Shuzworld should use, in terms of equipment, for manufacturing of its sneakers I recommend Shuzworld should purchase new equipment.

This is based on my analysis comparing the reconditioning of old equipment verses the purchasing of new equipment or that of outsourcing the operation. In doing this I took into account the both cost types that of fixed costs and variable costs. So that I could use the breakeven cost volume analysis tool I had to consider all variable costs as a constant with the relationship between those two costs as linear and not exponential.

In my analysis I use consistent costs with differing scenarios which allow the use of POM for Windows to be used to assist in this decision. Using this I noted the inputs for all three options under consideration. The information for both fixed and variable costs was derived from information shared by Alistair Wu and Angela Down. Using further information obtain via Alistair Wu I set the volume to 1000 sneakers as a starting point.

The information shared shows fixed costs for reconditioning is $50,000 with $1,000,000 spent in variable costs being that anticipated expense to 1.5 million dollars. The purchase of new equipment has a fixed expense of $200,000 but the variable costs drop to half that of reconditioning at only $500,000 giving a total cost of $700,000. With outsourcing there is no initial expense so no fixed cost but the variable costs have a dramatic increase at 3 million dollars. This would be two times the cost of reconditioning and 4 times the cost of purchasing new equipment.

This data then leads to one conclusion for the company that of purchasing new equipment as the company will save money by choosing this path. It is true that the fixed costs are higher but the saving in variable costs make up for that