"That old equipment for producing subassemblies is worn out," said Bruce Truesdale, president of Truesdale Company. "We need to make a decision quickly." The company is trying to decide whether it should rent new equipment and continue to make its subassemblies internally, or whether it should discontinue production of its subassemblies and purchase them from an outside supplier. The alternatives follow:
| Alternative 1: |
Rent new equipment for producing the subassemblies for $90,000 per year. |
| Alternative 2: |
Purchase subassemblies from an outside supplier for $7 each. |
|
Truesdale Company's current costs per unit of producing the subassemblies internally (with the old equipment) are given below. These costs are based on a current activity level of 50,000 subassemblies per year:
|
|
|
| Direct materials |
$ |
1.57 |
| Direct labor |
|
4.00 |
| Variable overhead |
|
0.90 |
Fixed overhead ($0.60 supervision, $1.10 depreciation,
and $2 general company overhead) |
|
3.70 |
|
|
|
| Total cost per unit |
$ |
10.17 |
|
|
|
|
|
The new equipment would be more efficient and, according to the manufacturer, would reduce direct labor costs and variable overhead costs by 30%. Supervision cost ($30,000 per year) and direct materials cost per unit would not be affected by the new equipment. The new equipment's capacity would be 90,000 subassemblies per year.
|
|
The total general company overhead would be unaffected by this decision.
|
| Required: |
| 1. |
The president is unsure what the company should do and would like an analysis showing the unit costs and total costs for each of the two alternatives given above. Assume that 50,000 subassemblies are needed each year.
|
| a. |
What will be the total relevant cost of 50,000 subassemblies if they are manufactured internally as compared to being purchased? (Do not round intermediate calculations.)
|
| Total relevant cost (50,000 subassemblies) |
$ |
| b. |
What would be the per unit cost of the each subassembly manufactured internally? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
|
| Per unit cost of subassembly |
$ |
| c. |
Which course of action would you recommend to the president? |
|
|
|
|
Purchase from the outside supplier |
|
Indifferent between the two alternatives |
|
Manufacture internally |
|
| 2a-1. |
What will be the total relevant cost of 60,000 subassemblies if they are manufactured internally? (Do not round intermediate calculations.)
|
| Total relevant cost (60,000 subassemblies) |
$ |
| 2a-2. |
What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
|
| Per unit cost of subassembly |
$ |
| 2a-3. |
Which course of action would you recommend if 60,000 assemblies are needed each year?
|
|
|
|
|
Manufacture internally |
|
Purchase from the outside supplier |
|
Indifferent between the two alternatives |
|
| 2b-1. |
What will be the total relevant cost of 70,000 subassemblies if they are manufactured internally? (Do not round intermediate calculations.)
|
| Total relevant cost (70,000 subassemblies) |
$ |
| 2b-2. |
What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
|
| Per unit cost of subassembly |
$ |
| 2b-3. |
Which course of action would you recommend if 70,000 assemblies are needed each year?
|
|
|
|
|
Indifferent between the two alternatives |
|
Manufacture internally |
|
Purchase from the outside supplier |
|