Steve Phillips, a senior manager in a U.S. manufacturing firm must make a recommendation about whether to move 57 labor-intensive jobs from the existing California plant to a new facility in a Mexican maquiladora. The Mexican opportunity would require deciding the mode of entry (subcontracting, shelter operator, or wholly owned subsidiary) and location (border or interior). One of the factors of decision making is the figures of costs about the four options, including do nothing.
No fixed costs are associated with the subcontracting arrangement and stay in U.S. (Doing nothing). If the firm decides to go with the shelter operation, fixed costs include construction, site leasing, startup expenditures, the plant manager’s salary, corporate taxes, and various other miscellaneous expenses. Variable costs include the hourly wage, materials, and transportation costs. The wholly owned subsidiary includes most of the same fixed costs as the shelter operation, but adds the consulting fee and Mexican legal fees. How many years can the 57 labor cost saving cover the new fixed investment would be mainly concerned.
Most employees at Huxley’s San Diego plant were women. The plant experienced high employee turnover because working with metals was a dirty job. The Huxley maquillage project report suggested that young Mexican women might be more productive that their American counterparts because they would be more patient. Hence, even if the going wage rate south of the border was identical to that paid in San Diego, unit costs would be lower due to the increased productivity at a Mexican facility.
In making its decisions, Huxley needs to consider the long run costs if it expects the move to be permanent. Most of the fixed expenses associated with the shelter and wholly owned subsidiaries are one time start up expenditures. It makes little sense for Huxley to consider a long term commitment to its Mexican operations if it cannot recover these expenses in the...