Reference no: EM133188606

Question - Frontier is a high-tech manufacturer that produces cutting edge technology hardware. Frontier's present cost to manufacture one unit of the spindle motor - one main component for its SSD hard drives - is given below (based on 60,000 units produced per year):

Direct Material £10.35

Direct Labour £6.00

Variable Overhead £1.50 Fixed Overhead £5.15

- General Company Overhead £2.80

- Depreciation £1.60

- Supervision £0.75

Total cost per unit £23.00

The senior management has analysed that the equipment being used to make the spindle motors is completely worn out and must be replaced. Thus, a decision about whether to make or buy the spindle motor is especially important at this time. The choices facing Frontier are:

Alternative 1 Purchase new equipment and continue to make the spindle motor. The equipment would cost £810,000 and presents the following depreciation costs per volume of activity

60,000 units produced per year 75,000 units produced per year 90,000 units produced per year Depreciation per spindle motor £2.25 £1.80 £1.5

Alternative 2 Purchase the spindle motor from an outside supplier at £18 per unit under a six-year contract

The new equipment would be more efficient than the equipment that Frontier has been using and, according to the manufacturer, would reduce direct labour and variable overhead costs by 30%. The old equipment has no resale value. Supervision cost (£45,000 per year) and direct materials cost per unit of spindle motor would not be affected by the new equipment. The new equipment's capacity would be 90,000 units per year. The company has no other use for the space being used to produce the spindle motors. The company's total general company overhead would be unaffected by this decision

A) To assist the managing director in making a decision, make an analysis showing what the total cost and the cost per unit of the spindle motor would be under each of the alternatives given above. Assume that 60,000 units of spindle motor are needed each year. Which course of action would you recommend to the managing director? Justify.

b) Would your recommendation in Requirement (a) above be the same if the company's needs were: (i) 75,000 units of spindle motor per year or (ii) 90,000 units of spindle motor per year? Justify your recommendation in each scenario and show computations to support your answer, with costs presented on both a total and a per unit basis.

What other qualitative factors would you recommend that Frontier managers consider before making a decision? Describe at least 4 factors.