Question

X Company currently buys 7,500 units of a part each year from a supplier for $7.80 per part, 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 6 years, at which time it will have zero disposal value. X Company estimates that it will cost $28,950 a year to make all 7,500 units.

What is the approximate rate of return if X Company makes the part instead of buying it from the supplier? [Note: 0.03 means 3%, etc.]

Answer 1

Statemtn of Comparing yearly cost
	Amount
Cost to Buy
Cost of buying 7500 units @7.80	58500
Total Purchase cost (A)	58500
Cost to manufacture
Equipmetnt cost( depreciation of 1 year)	25000	As the life of asset is 6 years, assuming depreciating evenly, cost for one year will be (150000/6 = 25000)
Manufacturing cost of 7500 units	28950
Total macufacturing cost (B)	53950
Annual saving if manufactured (A-B)	4550
No. of years	6
Total savings in 6 years	27300	(4550*6)

Rate of retrun	=annual savings / initial investment
	=4550/150000
	0.030333
	=3.033%