X Company currently buys 6,000 units of a component part each year from a suppli

Question

X Company currently buys 6,000 units of a component part each year from a supplier for $8.70 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 $22,650 a year to make the 6,000 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 Cost of Purchasing = 6000*8.70             52,200.00 Cost of Making          (22,650.00) Depreciation = 150,000/6          (25,000.00) Net Savings In making               4,550.00 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 = 4,550/150,000 Simple rate of return = 3.03%

Related Questions

Navigate

• Browse (All)
• Browse X
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.