Business Studies HSC HSC Practice Question 1a – Outsourcing

PulseHome is a mid-sized company that designs and sells smart home air-quality monitors. It currently assembles all devices in-house in Melbourne. Demand is forecast to rise from 40,000 units this year to 70,000 units next year after a major retail contract.

PulseHome’s operations team is considering outsourcing final assembly and packaging to a specialist electronics manufacturer in Vietnam. The supplier has quoted a unit assembly and packaging price of \$18 per device if PulseHome commits to at least 60,000 units for the year. PulseHome would continue to source key sensors itself and ship them to the supplier.

Current in-house assembly and packaging costs are estimated at \$12 variable cost per unit plus \$420,000 per year in fixed costs (supervisors, equipment leases, and factory overheads). If PulseHome outsources, it can exit the equipment leases and reduce fixed costs by \$300,000 per year, but it will still incur \$120,000 per year for quality engineers and supplier management.

Outsourcing would add an average of 4 weeks to lead time due to shipping and customs. The supplier offers a 2% defect rate target; PulseHome’s current in-house defect rate is 1%. PulseHome’s brand promise is “fast replacements within 48 hours” for faulty products. The retail contract includes a penalty of \$8 per unit for late delivery beyond the agreed weekly schedule.

PulseHome’s CEO is also considering using the freed-up factory space to create a small “rapid response” line capable of assembling up to 10,000 units per year for urgent orders and replacements, at a higher variable cost of \$20 per unit but with a 1% defect rate and 1-week lead time.