Kindly do a one page report/analysis of the McMichael Inc case study and make recomendation on which decision the company should make. Whether it should stick with the French company or go with OSA. 346 / 577McMichael Inc.Art Flynn, packaging buyer for McMichael Inc. (MI),was working on an import substitution project involvinga local minority supplier. He was concerned, however,*1Purchasing and Supply97%F6F7McMichael Inc., a medium-sized company, had overthe years specialized in prescription skin-care products,a market niche in which it had developed an excellentreputation. About three years ago, after extensive testing,MI had introduced a new facial cream in a special pack-age that allowed for precise measurement of the quan-tity dispersed. The container, manufactured by a Frenchfirm for a different application, was fairly expensive atan FOB MI's factory cost of $0.36. What concerned ArtFlynn even more, however, were the quality and deliveryproblems encountered. Communications with the manu-facturer were difficult, and Art had the impression themanufacturer did not seem to care much about MI's business, which, as Art knew, was only a small proportion oftheir total volume produced.With the cooperation of MI's marketing, engineering.F8that his efforts would be fruitless because his original pro-posal had been flatly rejected by the plant manager as tooexpensive.F9ManagementWhen Art submitted this quote along with the requestfor a $56,000 mold investment up front, the plant man-ager and treasurer both turned it down, arguing that the24-month payback on the mold was far too long and thatthe company had better investment opportunities with a12-month payback.Art was disappointed because he had hoped this proj-ect would assist in helping him meet his savings targetfor the year. When he talked the idea over with his man-ager, Louise Moffat, she suggested he give it another try.She said, "I am sure that if you can get the mold pay-back down to 15 months, you will get a warmer rec:er reception indThere are not that many deals around this company thatpay for themselves in one year." She also suggested that to aArt talk to marketing to see if some other products coulduse the same packaging and talk the production schedul-53°F CloudyF10Chapter 11 Cost Management 327F11F12HomeAEnd 346 / 577with the cooperation of Mi 3 marketing, engineering,production, and quality control personnel, Art had found alocal minority supplier who appeared capable of meetingMI's requirements. This custom molding firm, OSA Inc.,was owned by Bert Wood, a bright engineer, who had pur-chased the firm several years earlier when the previousowner wished to retire. OSA Inc. had its own tool and diemanufacturing operation as well as its own molding shop.It depended heavily on automotive contracts, a situationBert Wood wished to correct by acquiring more nonau-tomotive business. In conjunction with MI's engineers,Bert Wood had worked out a mold design for the creamdispenser and included several suggestions for minorimprovements. The cost of the mold was $56,000, aninvestment Bert Wood was in no position to make and thatMI would have to absorb up front. Bert Wood quoted aunit price of $0.27 based on purchase quantities of 30,000units at a time and an annual volume estimated at 300.000units. Bert Wood had submitted a cost breakdown of thisquote as follows:ResinLaborOverhead"97%Overhead breakdown.PowerDepreciationSpace, insurance, lightand heat, taxes, supervision16¢3¢8€27¢leUSC De same packaging and talk the production stheaureing group to check if different production quantities: couldbe ordered.When Art talked to the marketing people, he foundout that the package was ideal for another product to beintroduced shortly and with an annual demand estimatedat 100,000 units. Marketing had been uneasy about usingthe French package because of the difficulties encoun-tered with it and assured Art that if he could get a reliabledomestic source, this option would be highly attractive.The scheduling group, for a number of years, hadused a modified MRP system. When Art discussed thenew package idea with them, they told him that if thenew product and the older one were to be packaged inthe same package, a total package requirement of about40,000 units would make sense and that the master pro-duction schedule could easily be adjusted to run the twoproducts in conjunction.Art also discussed the situation with the resin supplier,who indicated that his quote to Bert Wood had beer: basedon the lot size of 30,000 packages, but that a 40,000 unitlot would fall into a new price bracket 5 percent lowerthan the originally quoted price.Art wondered just what effect all of this new informa-tion would have on his original proposal. He knew thatBert Wood had been adamant about his $0.27 quote. BertWood had said, "I know I am classified as a minority sup-plier. But I don't want to hide behind that fact. I wantno special favors from any of my customers. Ner am Iin a position to make special gifts to anyone else. I havehad to borrow at what I consider to be ridiculously highinterest rates to buy this company. Now I have to make it dowpay off. My $0.27 price is as low as I can go, as ar as I to activcan see."53°F Cloudy A B

Question

Kindly do a one page report/analysis of the McMichael Inc case study and make recomendation on which decision the company should make. Whether it should stick with the French company or go with OSA. 346 / 577McMichael Inc.Art Flynn, packaging buyer for McMichael Inc. (MI),was working on an import substitution project involvinga local minority supplier. He was concerned, however,*1Purchasing and Supply97%F6F7McMichael Inc., a medium-sized company, had overthe years specialized in prescription skin-care products,a market niche in which it had developed an excellentreputation. About three years ago, after extensive testing,MI had introduced a new facial cream in a special pack-age that allowed for precise measurement of the quan-tity dispersed. The container, manufactured by a Frenchfirm for a different application, was fairly expensive atan FOB MI's factory cost of $0.36. What concerned ArtFlynn even more, however, were the quality and deliveryproblems encountered. Communications with the manu-facturer were difficult, and Art had the impression themanufacturer did not seem to care much about MI's business, which, as Art knew, was only a small proportion oftheir total volume produced.With the cooperation of MI's marketing, engineering.F8that his efforts would be fruitless because his original pro-posal had been flatly rejected by the plant manager as tooexpensive.F9ManagementWhen Art submitted this quote along with the requestfor a $56,000 mold investment up front, the plant man-ager and treasurer both turned it down, arguing that the24-month payback on the mold was far too long and thatthe company had better investment opportunities with a12-month payback.Art was disappointed because he had hoped this proj-ect would assist in helping him meet his savings targetfor the year. When he talked the idea over with his man-ager, Louise Moffat, she suggested he give it another try.She said, &#34;I am sure that if you can get the mold pay-back down to 15 months, you will get a warmer rec:er reception indThere are not that many deals around this company thatpay for themselves in one year.&#34; She also suggested that to aArt talk to marketing to see if some other products coulduse the same packaging and talk the production schedul-53°F CloudyF10Chapter 11 Cost Management 327F11F12HomeAEnd 346 / 577with the cooperation of Mi 3 marketing, engineering,production, and quality control personnel, Art had found alocal minority supplier who appeared capable of meetingMI's requirements. This custom molding firm, OSA Inc.,was owned by Bert Wood, a bright engineer, who had pur-chased the firm several years earlier when the previousowner wished to retire. OSA Inc. had its own tool and diemanufacturing operation as well as its own molding shop.It depended heavily on automotive contracts, a situationBert Wood wished to correct by acquiring more nonau-tomotive business. In conjunction with MI's engineers,Bert Wood had worked out a mold design for the creamdispenser and included several suggestions for minorimprovements. The cost of the mold was $56,000, aninvestment Bert Wood was in no position to make and thatMI would have to absorb up front. Bert Wood quoted aunit price of $0.27 based on purchase quantities of 30,000units at a time and an annual volume estimated at 300.000units. Bert Wood had submitted a cost breakdown of thisquote as follows:ResinLaborOverhead&#34;97%Overhead breakdown.PowerDepreciationSpace, insurance, lightand heat, taxes, supervision16¢3¢8€27¢leUSC De same packaging and talk the production stheaureing group to check if different production quantities: couldbe ordered.When Art talked to the marketing people, he foundout that the package was ideal for another product to beintroduced shortly and with an annual demand estimatedat 100,000 units. Marketing had been uneasy about usingthe French package because of the difficulties encoun-tered with it and assured Art that if he could get a reliabledomestic source, this option would be highly attractive.The scheduling group, for a number of years, hadused a modified MRP system. When Art discussed thenew package idea with them, they told him that if thenew product and the older one were to be packaged inthe same package, a total package requirement of about40,000 units would make sense and that the master pro-duction schedule could easily be adjusted to run the twoproducts in conjunction.Art also discussed the situation with the resin supplier,who indicated that his quote to Bert Wood had beer: basedon the lot size of 30,000 packages, but that a 40,000 unitlot would fall into a new price bracket 5 percent lowerthan the originally quoted price.Art wondered just what effect all of this new informa-tion would have on his original proposal. He knew thatBert Wood had been adamant about his $0.27 quote. BertWood had said, &#34;I know I am classified as a minority sup-plier. But I don't want to hide behind that fact. I wantno special favors from any of my customers. Ner am Iin a position to make special gifts to anyone else. I havehad to borrow at what I consider to be ridiculously highinterest rates to buy this company. Now I have to make it dowpay off. My $0.27 price is as low as I can go, as ar as I to activcan see.&#34;53°F Cloudy A B

Accepted Answer

Located in the US, McMichael Inc. develops and produces premium hydraulic pumps for the building…