Question

X Company currently buys 6,000 units of a part each year from a supplier for $8.60 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 $20,130 a year to make all 6,000 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

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.