X Company currently buys 8,000 units of a component part each year from a suppli

Question

X Company currently buys 8,000 units of a component part each year from a supplier for $8.00 each, but it is considering making the part instead. In order to make the part, X Company will have to buy equipment that will cost $150,000. The equipment will last for six years, at which time it will have zero disposal value. X Company estimates that it will cost $31,550 a year to make the 8,000 units. What is the approximate rate of return if X Company makes the part instead of buying it from the supplier?

Explanation / Answer

Year machine cost Depreciation Cost Total cost Original cost is bought Profit Return 0                  150,000 1                25,000          31,550      56,550                                  64,000         7,450 11.64% 2                25,000          31,550      56,550                                  64,000         7,450 11.64% 3                25,000          31,550      56,550                                  64,000         7,450 11.64% 4                25,000          31,550      56,550                                  64,000         7,450 11.64% 5                25,000          31,550      56,550                                  64,000         7,450 11.64% 6                25,000          31,550      56,550                                  64,000         7,450 11.64%

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