That old equipment for producing subassemblies is worn out, said Paul Taylor, pr
ID: 2373757 • Letter: T
Question
That old equipment for producing subassemblies is worn out, said Paul Taylor, president of Timkin 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 subassemblies internally, or whether it should discontinue production of its subassemblies and purchase them from an outside supplier. The alternatives follow:
Timkin Companys current costs per unit of producing the subassemblies internally (with the old equipment) are given below. These costs are based on a current activity level of 40,000 subassemblies per year:
The new equipment would be more efficient and, according to the manufacturer, would reduce direct labor costs and variable overhead costs by 15%. Supervision cost ($30,000 per year) and direct materials cost per unit would not be affected by the new equipment. The new equipment's capacity would be 60,000 subassemblies per year.
The president is unsure what the company should do and would like an analysis showing the unit costs and total costs for each of the two alternatives given above. Assume that 40,000 subassemblies are needed each year.
What will be the total relevant cost of 40,000 subassemblies if they are manufactured internally as compared to being purchased? (Do not round intermediate calculations. Omit the "$" sign in your response.)
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. Omit the "$" sign in your response.)
What will be the total relevant cost of 50,000 subassemblies if they are manufactured internally? (Do not round intermediate calculations. Omit the "$" sign in your response.)
What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
What will be the total relevant cost of 60,000 subassemblies if they are manufactured internally? (Do not round intermediate calculations. Omit the "$" sign in your response.)
What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Alternative 1: Rent new equipment for producing the subassemblies for $60,000 per year. Alternative 2: Purchase subassemblies from an outside supplier for $9 each.
Explanation / Answer
1. for 40000 subassemblies if produced internally then total cost = 60000 + 40000*(2.44+ 5.6*0.85 + 3.55) = 490000 pe unit = 490000/40000 = 12.25 total cost if buy from outside = 9*40000 = 360000 unit cost = 9 so buying from outside is better option here, a) total cost = 490000 b) per unit = 12.25 2) a-1) total relevant cost of 50,000 subassemblies if they are manufactured internally = 60000 + 50000*(2.44+ 5.6*0.85 + 3.55) = 597500 a-2) per unit cost of subassembly = 597500/50000 = 11.95 b-1) total relevant cost of 60,000 subassemblies if they are manufactured internally = 60000 + 60000*(2.44+ 5.6*0.85 + 3.55) = 705000 b-2) per unit cost of subassembly = 705000/60000 = 11.75
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