X Company currently buys 6,500 units of a component part each year from a suppli

Question

X Company currently buys 6,500 units of a component part each year from a supplier for $7.60 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 $20,785 a year to make the 6,500 units. What is the approximate rate of return if X Company makes the part instead of buying it from the supplier?

Explanation / Answer

Cost of Paurchasing compnent part is 6500 X $7.60 = $49400

calculation of Cost of making componenent part

Equipment cost is $150000 , For 1 year it is $150000/6 = $25000

cost of making is $20785/

Total cost of making an Equipment is $45785/-($25000+$20785)

X company rate of return is more if the component makes in house i.e $3615 ( $49400 - $45785 )

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