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: 2/16/2012 7:32:53 PM | Location : United States

Ask an Expert

Related Discussions:- Management accounting, accounting, Assignment Help, Ask Question on Management accounting, accounting, Get Answer, Expert's Help, Management accounting, accounting Discussions

Write discussion on Management accounting, accounting
Your posts are moderated

Write your message here..

Related Questions

Administering agency solutions, Administering agency solutions A professio... Administering agency solutions A professional specific by the Office of Economical Control to provide common management of economic sales action. An administering agency is also a

Strategy management , assignment. assignment.

Calculate operational variances -planning variances, You have recently join... You have recently joined XYZ, an international company that produces a wide range of office supplies and stationary goods. In your new role as Group Management Accountant your firs

I need to find what is wrong with this statement, the correlation between o... the correlation between olympic gold medal times for the 1500 m run and year is -0.941 seconds per year

Determine the hypothesised value, Read Confidence Intervals and P-values in... Read Confidence Intervals and P-values in Section C of your Lecture Workbook or on Cecil under Assignment Resources. Consider a study to determine ways the response rate in surveys

A m, what is the relationship between the variance and the standard deviati... what is the relationship between the variance and the standard deviation?

Job costing order, Diketahui: Biaya Bahan Baku 15.500 Biaya Tenaga Kerja La... Diketahui: Biaya Bahan Baku 15.500 Biaya Tenaga Kerja Langsung:14.750 Biaya Overhead pabrik 11.800 Barang Jadi 37500 Bahan baku yang deibebankan ke satu pesanan yang masih dalam

Budgets and budgetary control, Budgets and budgetary control A fund is... Budgets and budgetary control A fund is an operating plan for a business, ready in progress. Funds may be set in money conditions, egg a revenue funds of £500,000, or it can

Prepares reports on gasoline prices , The average cost of a gallon of unlea... The average cost of a gallon of unleaded gasoline in Greater Cincinnati was reported to be $2.41 (The Cincinnati Enquirer, February 3, 2006). During periods of rapidly changing pri

Management accounting, how cost classification can helpful for planning, co... how cost classification can helpful for planning, controlling and decision making