Compare the alternatives on a total-annual-cost , Financial Accounting

The Rohr Company's old equipment for making subassemblies is worn out. The company is considering two alternatives: a) Completely replacing the old equipment with new equipment

b) Buying sub-assemblies from a reliable outside supplier, who has quoted a unit price of 1$ on a seven-year contract for a minimum of 50 000 units per year.

Production was 60 000 units in each of the past two years. Future needs for the next seven years are not expected to fluctuate outside the range of 50 000 to 70 000 units per year. Cost records for the past two years reveal the following unit costs of manufacturing the sub-assembly:

Direct material 0.30$

Direct labour    0.35$

Variable overhead 0.10$

Fixed overhead 0.25$

Total Unit Cost 1$

The fixed overhead includes 0.10$ depreciation and 0.10 for direct departmental fixed overhead. The new equipment will cost 188 000$ and is expected to last seven years, at the end of which is estimated to have a disposal value of 20 000$. The current disposal value of the old equipment is      10 000$.

The sale representative for the new equipment has indicated that the increase in machine speeds will reduce the total of direct labour and variable overhead by 0.35$ per unit. Consider last year's experience of one of your major competitors with identical equipment. They produced 100 000 units under operating conditions cap arable to yours and showed the following unit cost:

Direct material 0.30$

Direct labour 0.05$

Variable overhead 0.05$

Depreciation 0.24$

Other fixed overhead 0.16$

Total Unit Cost 0.80$

You have established that any idle facilities could not be put to alternative use, and that 0.05$ per unit of the old Rohr unit cost is allocated fixed overhead that will be unaffected by the decision.

1) The president asks you to compare the alternatives on a total-annual-cost basis and on a-per-unit basis for annual needs of 60 000 units. Which alternative seems more attractive?

2) Would your answer change if the needs were at either end of the relevant range (50 000 units and 70 000 units) Demonstrate at what volume level Rohr would be indifferent between making and outsourcing sub-assemblies.

3) What factors, other than the preceding ones, should you bring to the attention of management to assist them in making their decision? Include the considerations that might be applied to the outside supplier.

Posted Date: 3/22/2013 5:41:49 AM | Location : United States

Related Discussions:- Compare the alternatives on a total-annual-cost , Assignment Help, Ask Question on Compare the alternatives on a total-annual-cost , Get Answer, Expert's Help, Compare the alternatives on a total-annual-cost Discussions

Write discussion on Compare the alternatives on a total-annual-cost
Your posts are moderated
Related Questions
A village ordered supplies for its Fire Department at an estimated cost of $16,700. The supplies were received with an invoice for $16,800. The village accepted the shipment and th

Vincent Ltd operates solely in Western Australia and the chief operating decision maker has identified five operating segments: Mining, Insurance, Retailing, Manufacturing and Tran

Questikon: For Period Wilson Ltd has produced the following budget figures for Product X: For the period, the budgeted fixed overhead is Rs100,000 and the budgeted sales ar

In June 2004, Feltex Carpets Limited raised NZ $254 million in an initial public offering. Twenty seven months later the company was in receivership, its share price having collaps

Montana Company signs a five-year capital lease with Elway Company for office equipment. The yearly lease payment is $20,000, and the interest rate is 8%.   1. Compute the cu

Comparison with Sector Averages Any conclusion relating to the signs of overtrading needs to be put in the context of the normal values of accounting ratios indicated by the se

A gift of residue Where property is not given by a specific legacy nor by a general legacy, it makes up the residue of the testator's estate.  If the testator fails to make a g

Retirement benefits 1)      Provident fund and family pension: a.       Contribution to PF and PPF are provided for and payments in respect thereof are made to the relevant

Focus Company issued a $30,000, 20 year bond with a stated interest rate of 7%. Assume interest payments are made annually. What is the selling price of the bond if the market ra

Right of indemnity If the Official Receiver or trustee has seized or disposed of any property in the possession of the debtor, without notice or claim relating thereto, he is