Huxley Maquiladora
CHAPTER 5: COST THEORY
Overview of Huxley Maquiladora
Huxley Manufacturing Company, a large firm in the defense industry, is considering a strategic move to shift production from its California plant to Mexico. Tariff reductions made possible by the North American Free Trade Agreement (NAFTA) opened up the potential to enjoy significant cost savings by shifting production south of the Mexican border. Huxley is considering three options. The simplest option is to negotiate a subcontracting arrangement in which a Mexican firm manufactures steering column components (SCCs) according to the specifications of Huxley. The subcontracting firm would then be paid by Huxley on a per-piece arrangement. A subcontracting arrangement would allow Huxley to decrease or possibly eliminate expenditures for capital items such as facilities and equipment, but would also entail the highest cost per labor hour. A second option was the shelter operation. Under a shelter arrangement, the Mexican firm would allow Huxley to maintain control over production. In return, the Mexican firm would provide various administrative, human resource management, and import/export services. A shelter arrangement would allow Huxley to enjoy a fast startup with while affording the client firm complete control over production. The shelter operation would entail more fixed costs than the subcontracting arrangement, but would also incur lower hourly labor expenses. The final possibility was to set up a wholly-owned subsidiary. This option would require Huxley to select a plant site, staff its own employees, implement its own procedures and policies, and obtain the appropriate permits and licenses to operate. Over the long run, the wholly-owned subsidiary offered the greatest potential for cost savings. Although the wholly-owned subsidiary would exhibit the highest level of fixed costs, it also promised the lowest hourly costs of the three options. Of course, Huxley might conclude that
Overview of Huxley Maquiladora
Huxley Manufacturing Company, a large firm in the defense industry, is considering a strategic move to shift production from its California plant to Mexico. Tariff reductions made possible by the North American Free Trade Agreement (NAFTA) opened up the potential to enjoy significant cost savings by shifting production south of the Mexican border. Huxley is considering three options. The simplest option is to negotiate a subcontracting arrangement in which a Mexican firm manufactures steering column components (SCCs) according to the specifications of Huxley. The subcontracting firm would then be paid by Huxley on a per-piece arrangement. A subcontracting arrangement would allow Huxley to decrease or possibly eliminate expenditures for capital items such as facilities and equipment, but would also entail the highest cost per labor hour. A second option was the shelter operation. Under a shelter arrangement, the Mexican firm would allow Huxley to maintain control over production. In return, the Mexican firm would provide various administrative, human resource management, and import/export services. A shelter arrangement would allow Huxley to enjoy a fast startup with while affording the client firm complete control over production. The shelter operation would entail more fixed costs than the subcontracting arrangement, but would also incur lower hourly labor expenses. The final possibility was to set up a wholly-owned subsidiary. This option would require Huxley to select a plant site, staff its own employees, implement its own procedures and policies, and obtain the appropriate permits and licenses to operate. Over the long run, the wholly-owned subsidiary offered the greatest potential for cost savings. Although the wholly-owned subsidiary would exhibit the highest level of fixed costs, it also promised the lowest hourly costs of the three options. Of course, Huxley might conclude that