“That old equipment for producing carburetors is worn out,” said Bill Seebach, p
ID: 2585273 • Letter: #
Question
“That old equipment for producing carburetors is worn out,” said Bill Seebach, president of Hondrich 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 carburetors internally or whether it should discontinue production of its carburetors and purchase them from an outside supplier. The alternatives follow:
Hondrich Company’s costs per unit of producing the carburetors internally (with the old equipment) are given below. These costs are based on a current activity level of 35,000 units per year:
The new equipment would be more efficient and, according to the manufacturer, would reduce direct labour costs and variable overhead costs by 25%. Supervision cost ($70,000 per year) and direct materials cost per unit would not be affected by the new equipment. The new equipment’s capacity would be 50,000 carburetors per year.
The total general company overhead would be unaffected by this decision.
Seebach 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.
What will be the total relevant cost of 40,000 subassemblies if they are manufactured internally?
What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Which course of action would you recommend if 40,000 assemblies are needed each year?
What will be the total relevant cost of 50,000 subassemblies if they are manufactured internally?
What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Which course of action would you recommend if 50,000 assemblies are needed each year?
“That old equipment for producing carburetors is worn out,” said Bill Seebach, president of Hondrich 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 carburetors internally or whether it should discontinue production of its carburetors and purchase them from an outside supplier. The alternatives follow:
Explanation / Answer
At 35000 unit requirement:
a1: 40000 units:
a2 : per unit cost = 774000/40000= 19.35
a3:
Indifferent between the two alternatives is correct. as making cost equals purchase cost
b1:
b2: per unit cost= 915000/50000= 18.3
b3: since cost of making is less than purchase cost,
is suggested
A Buying costs: Total units 35,000 Rate 19.35 Cost of buying from outside supplier 6,77,250 B Cost savings: Particulars Per unit Total Direct materials 5.4 1,89,000 Direct labor 7.5 2,62,500 Variable manufacturing OH 1.2 42,000 Equipment rent 1,40,000 Supervision 70,000 Total savings 14.1 7,03,500 C=A-B Advantage/(disadvantage) of buying (26,250)Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.