X Company currently buys 8,000 units of a component part each year from a suppli

Question

X Company currently buys 8,000 units of a component part each year from a supplier for $8.50 each, but it is considering making the part instead. In order to make the part, X Company will have to buy equipment that will cost $150,000. The equipment will last for six years, at which time it will have zero disposal value. X Company estimates that it will cost $37,490 a year to make the 8,000 units. What is the approximate rate of return if X Company makes the part instead of buying it from the supplier?

Explanation / Answer

Particulars Amount Sales Revenue Lost =600*17          10,200.00 Variable COGS = 600*6.54             3,924.00 Variable selling and Admin = 600*1.31                786.00 Reduction in firms Profits due to loss of sales             5,490.00 Particulars Amount Cost of Purchasing = 8000*8.50          68,000.00 Cost of Making        (37,490.00) Depreciation = 150,000/6        (25,000.00) Net Savings In making             5,510.00 Cost of new Machine        150,000.00 Scrap value of old machine                          -   Initial Investment        150,000.00 Simple rate of return = Annual Net operating inc/Initial invt Simple rate of return = 5,510/150,000 Simple rate of return = 3.67%

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