“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:
Alternative 1: Rent new
equipment for producing the carburetors for $207,000 per
year.
Alternative 2: Purchase
carburetors from an outside supplier for $22.60 each.
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
30,000 units per year:
| Direct materials | $ | 5.80 | |
| Direct labour | 11.00 | ||
| Variable overhead | 2.40 | ||
| Fixed overhead ($3.45 supervision, $1.80
depreciation, and $4.00 general company overhead) |
9.25 | ||
| Total cost per unit | $ | 28.45 | |
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
($103,500 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.
Required:
1. 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. Assume that 30,000
carburetors are needed each year.
a. What will be the total relevant cost
of 30,000 subassemblies if they are manufactured internally as
compared to being purchased?
b. What would be the per unit cost of the each subassembly manufactured internally? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. Which course of action would you recommend to the president?
Manufacture internally
Purchase from the outside supplier
Indifferent between the two alternatives
2. 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.
a-1. What will be the total relevant cost
of 46,000 subassemblies if they are manufactured internally?
a-2. What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
a-3. Which course of action would you recommend if 46,000 assemblies are needed each year?
Purchase from the outside supplier
Indifferent between the two alternatives
Manufacture internally
b-1. What will be the total relevant cost of 50,000 subassemblies if they are manufactured internally?
b-2. What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b-3. Which course of action would you recommend if 50,000 assemblies are needed each year?
1.Relevant cost of manufacturing = Avoidable cost
= (5.80+11*75%%+2.40*75%)*30,000 + 103,500 +207,000
= $786,000
Per unit cost = 786,000/30,000 = $26.20
c.Purchase from outside supplier since lower cost
b-1 Cost = 15.85*46000 + 103,500 +207,000
= $1,039,600
Per unit = $22.6
Indifferent between the two alternatives
b-1 Total cost = 15.85*50000 + 103,500 +207,000
= $1,103,000
Per unit = $22.06
Manufacture internally
Note: Depreciation and General Allocated costs are not relevant since unavoidable
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