“That old equipment for producing subassemblies is worn out,” said Bruce Truesda
ID: 2483156 • Letter: #
Question
“That old equipment for producing subassemblies is worn out,” said Bruce Truesdale, president of Truesdale 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:
Truesdale Company’s 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 30%. 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.)
What would be the per unit cost of the each subassembly manufactured internally? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
What will be the total relevant cost of 50,000 subassemblies if they are manufactured internally? (Do not round intermediate calculations.)
What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
What will be the total relevant cost of 60,000 subassemblies if they are manufactured internally? (Do not round intermediate calculations.)
What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
“That old equipment for producing subassemblies is worn out,” said Bruce Truesdale, president of Truesdale 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:
Explanation / Answer
1.
If new Machine Hired, Cost will be as follow (For 60,000 Units)
a. Total Cost total relevant cost of 40,000 subassemblies if they are manufactured internally.
If purchased from outside total cost would be 40,000 units * 6 = 240,000/-
b. The per unit cost of the each subassembly manufactured internally $9.45/-
c. Purchase from the outside supplier
Indifferent between the two alternatives $3.45 per unit
2a-1. The total relevant cost of 50,000 subassemblies if they are manufactured internally.
If purchased from outside total cost would be 50,000 units * 6 = 300,000/-
2a-2. The per unit cost of the each subassembly manufactured internally $8.40/-
2a-3. Purchase from the outside supplier
Indifferent between the two alternatives $2.40 per unit
2b-1. The total relevant cost of 60,000 subassemblies if they are manufactured internally.
If purchased from outside total cost would be 60,000 units * 6 = 360,000/-
2a-2. The per unit cost of the each subassembly manufactured internally $7.70/-
2a-3. Purchase from the outside supplier
Indifferent between the two alternatives $1.70 per unit
Per Unit Total Direct Material 1.61 Direct Labour 2.10 Variable overhead 0.49 Fixed Overhead Supervisor 30,000 General Company Overhead 120,000 Total 4.20 150,000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.