That old equipment for producing subassemblies is worn out

Reference no: EM13607309

"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:

Alternative 1:	Rent new equipment for producing the subassemblies for $90,000 per year.
Alternative 2:	Purchase subassemblies from an outside supplier for $7 each.

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 50,000 subassemblies per year:


Direct materials	$	1.57
Direct labor		4.00
Variable overhead		0.90
Fixed overhead ($0.60 supervision, $1.10 depreciation, and $2 general company overhead)		3.70

Total cost per unit	$	10.17

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 90,000 subassemblies per year.

The total general company overhead would be unaffected by this decision.

A.	What will be the total relevant cost of 60,000 subassemblies if they are manufactured internally? (Do not round intermediate calculations.)

Total relevant cost (60,000 subassemblies)

B.	What would be the per unit cost of subassembly? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Per unit cost of subassembly

C.	What will be the total relevant cost of 50,000 subassemblies if they are manufactured internally as compared to being purchased? (Do not round intermediate calculations.)

Total relevant cost (50,000 subassemblies)

D.	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.)

Per unit cost of subassembly

Reference no: EM13607309

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