That old equipment for producing carburetors is worn out\" said Bill Seebach, pr

Question

That old equipment for producing carburetors is worn out" said Bill Seebach, president of Hondrich Company We need to make a decision quickly." new equipment and continue to of its carburetors and purchase them from an outside supplier. The alternatives follow The company is trying to decide whether it should rent make its carburetors internally or whether it should discontinue production Iternative 1: Rent new equipment for producing the carburetors for $175,000 per year Alternative 2: Purchase carburetors from an outside supplier for $17.80 each Hondrich Company's costs per unit of producing the carbüretors internally (with the old equipment) are given below. These costs are based on a current activity level of 35,000 units per year Direct materials Direct labour Variable overhead Fixed overhead ($2.50 supervision, $1.90 depreciation S 6.10 7.00 1.60 and $5.00 general company overhead) Total cost per unit 9.40 $24.10 The new equipment would be more efficient and, according to the manufacturer, would reduce direct ur costs and variable overhead costs by 25% Supervision cost $87,500 per year and direct materials labo per unit would not be affected by the new equipment. The new equipment's capacity would be 62,500 The total general company overhead would be unaffected by this decisicn carburetors per year Requirea 1. Seebach 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 35,000 carburetors are needed each year a. What will be the total relevantc of 35,000 subassemblies f they are manufactured internally as compared to being purchased? Total relevant cost (35,000 subassemblies)

Explanation / Answer

1 a Cost with manufactured internally Direct Material 213500 =6.1*35000 Direct Labour 183750 =7*35000*75% Variable Overhead 42000 =1.6*35000*75% New Equipment 175000 Supervision Cost 87500 Total Relevant cost 701750 b Per unit cost 20.05 c Purchase from outside supplier 2 a-1 Cost with manufactured internally Direct Material 305000 =6.1*50000 Direct Labour 262500 =7*50000*75% Variable Overhead 60000 =1.6*50000*75% New Equipment 175000 Supervision Cost 87500 Total Relevant cost 890000 a-2 Per unit cost 17.80 a-3 Indifferent b1 Cost with manufactured internally Direct Material 381250 =6.1*50000 Direct Labour 328125 =7*50000*75% Variable Overhead 75000 =1.6*50000*75% New Equipment 175000 Supervision Cost 87500 Total Relevant cost 1046875 b2 Per unit cost 16.75 b3 Manufacture Internally

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