Outsourcing Structural Steel Systems manufactures steel buildings for agricultur
ID: 2450003 • Letter: O
Question
Outsourcing Structural
Steel Systems manufactures steel buildings for agricultural and home applications. Currently, managers are trying to decide between two alternatives regarding a major overhead door assembly for the company’s buildings. The alternatives are as follows: Purchase new equipment with a five-year life and no salvage value at a cost of $10,000,000. The company uses straight-line depreciation and allocates that amount on a per-unit-of-production basis. Purchase the assemblies from an outside vendor who will sell them for $480 each under a five-year contract.
Following is Structural Steel Systems’ present cost to produce one door assembly based on current and normal activity of 50,000 units per year.
The new equipment would be more efficient than the old equipment and would reduce direct labor costs and variable overhead costs by 25 percent. Supervisory costs of $700,000 would be unaffected. The new equipment would have a capacity of 75,000 assemblies per year. Structural Steel Systems could lease the space occupied by current assembly production to another firm for $228,000 per year if the company decides to buy from the outside vendor.
a. Show an analysis, including relevant unit and total costs, for each alternative of producing or buying the assemblies. Assume 50,000 assemblies are needed each year. Round your answers to the nearest cent.
b. How would your answer differ if 60,000 assemblies were needed? Round your answers to the nearest cent.
c. How would your answer differ if 75,000 assemblies were needed? Round your answers to the nearest cent.
Cost to make: Direct materials $ per unit Direct labor $ per unit Variable overhead $ per unit Fixed overhead: Rental value of production space $ per unit Depreciation on new machine $ per unit Total unit cost $ per unit Cost to buy: $ per unitExplanation / Answer
Outsourcing Structural Steel Systems manufactures steel buildings for agricultur
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