Three basic concepts - Research Paper Example

Here comes the option of outsourcing either the whole manufacturing unit or certain major business activities while would help BlueJay in increasing its output. Now in this context there are two things that need to be considered; first, what portions of the manufacturing unit should be outsourced, and second is the amount of capital investment that BlueJay has to make for this new outsourcing plan. This study aim at discussing the basic concepts of the cost of ownership understanding single or multiple options of outsourcing business operational activities of the company.

A relationship between cost estimation and financial statements would be explained to validate the basic concepts. For understanding the nuances of the supply chain management in the company, cost of ownership plays an important role. The different elements associated with the cost of ownership involve purchasing price, salvage value or resale value and other expenses which lead to acquisition, disposal and conversion. These further includes the cost associated with purchase of orders, delivery charges, search costs, handling and storage cost, maintenance cost, repair, etc, and disposal.

Cost of ownership when incorporated for analysis of the financial benefit presents cost base for the determination of the economic value of investments. For example internal rate of return, return on investment. The cost of ownership analysis includes operating cost and total cost for acquisition. It is also used to measure the viability of the capital investment. Enterprise may utilize it to as a comparison tool (Zachariassen, & Arlbjorn, 2009, p. 5-8). The three concepts which closely align the cost of ownership are the life-cycle costing, zero based costing and cost-based evaluation of supplier’s performance.

All of these concepts are developed to monitor the performance of the suppliers based on the expectations of the firm. The objective is to focus more on the maintenance of long-term relationship with the suppliers, but at the same time calculate the cost associated with supply chain management and manufacturing. In this case the outsourcing cost can be estimated. In order to calculate the cost of ownership BlueJay has to follow an eight step process: a) Analyze the present scenario of the company, b) Map the activities and the processes in the company, c) Identification of the cost drivers, d) Collect the data on activity usage, e) Identification of the potential solution/solutions, f) Estimation of the cost drivers associated with the improvements, g) Calculation of the cost of ownership for different scenarios (before and after), and f) Presenting the results (Woodside, Gibbert, & Golfetto, 2008, p. 207-209). Cost estimates are nothing but approximation of the project cost, which is important for avoiding the problems associated with cost overrun.

In case of BlueJay the manufacturing cost would have to be estimated, which can be segregated into three categories; manufacturing overhead, labor cost, and direct material costs. The cost estimates are utilized to conduct a cost-volume-profit analysis to project a revenue figure of the company with respect to its volume of production and the cost incurred by the company for it. Another reason for evaluating the cost-volume profit is to identify the breakeven point of the company’s revenue generation.

The estimation of the cost of the manufacturing unit is documented in the cost sheet of a company, which in turn is