Compare the alternatives on a total-annual-cost , Financial Accounting

Assignment Help:

The Rohr Company's old equipment for making subassemblies is worn out. The company is considering two alternatives: a) Completely replacing the old equipment with new equipment

b) Buying sub-assemblies from a reliable outside supplier, who has quoted a unit price of 1$ on a seven-year contract for a minimum of 50 000 units per year.

Production was 60 000 units in each of the past two years. Future needs for the next seven years are not expected to fluctuate outside the range of 50 000 to 70 000 units per year. Cost records for the past two years reveal the following unit costs of manufacturing the sub-assembly:

Direct material 0.30$

Direct labour    0.35$

Variable overhead 0.10$

Fixed overhead 0.25$

Total Unit Cost 1$

The fixed overhead includes 0.10$ depreciation and 0.10 for direct departmental fixed overhead. The new equipment will cost 188 000$ and is expected to last seven years, at the end of which is estimated to have a disposal value of 20 000$. The current disposal value of the old equipment is      10 000$.

The sale representative for the new equipment has indicated that the increase in machine speeds will reduce the total of direct labour and variable overhead by 0.35$ per unit. Consider last year's experience of one of your major competitors with identical equipment. They produced 100 000 units under operating conditions cap arable to yours and showed the following unit cost:

Direct material 0.30$

Direct labour 0.05$

Variable overhead 0.05$

Depreciation 0.24$

Other fixed overhead 0.16$

Total Unit Cost 0.80$

You have established that any idle facilities could not be put to alternative use, and that 0.05$ per unit of the old Rohr unit cost is allocated fixed overhead that will be unaffected by the decision.

1) The president asks you to compare the alternatives on a total-annual-cost basis and on a-per-unit basis for annual needs of 60 000 units. Which alternative seems more attractive?

2) Would your answer change if the needs were at either end of the relevant range (50 000 units and 70 000 units) Demonstrate at what volume level Rohr would be indifferent between making and outsourcing sub-assemblies.

3) What factors, other than the preceding ones, should you bring to the attention of management to assist them in making their decision? Include the considerations that might be applied to the outside supplier.


Related Discussions:- Compare the alternatives on a total-annual-cost

Balance sheet and income statement, 1) The detailed information is on the s...

1) The detailed information is on the second tab marked "Financials". Enter summarized Balance Sheet and Income Statement information for Cummins into the template on the "Summary

Finacial management, There are two projects A and B. The initial capital ou...

There are two projects A and B. The initial capital outlay of A and B are Rs.1,35,000 and Rs.2,40,000 respectively. There will be no scrap value at the end of the life of both the

Comment on financial position and performance, BFD Co has occurrence rapid ...

BFD Co has occurrence rapid growth in turnover since its formation three years ago but it has been unable to maintain net profit margin which has fallen from 19% in 2002 to 12% in

#title.patnership, AsIDENTIFY THE MAIN PROVISIONS OF THE PARTNERSHIP ACT k ...

AsIDENTIFY THE MAIN PROVISIONS OF THE PARTNERSHIP ACT k question #Minimum 100 words accepted#

Abatement of legacies-executorship laws and accounts, ABATEMENT OF LEGACIES...

ABATEMENT OF LEGACIES (a) If the assets, after the payment of debts, necessary expenses and specific legacies, are not sufficient to pay all the general legacies in full, the l

Unrealized profit on property, Unrealized profit on Property, Plant and Equ...

Unrealized profit on Property, Plant and Equipment Where one company sells an item of PPE  to the other company in the group then, this will lead to two main problems. a) The se

What are allie''s stock basis, Monte and Allie each own 50% of Raider Corpo...

Monte and Allie each own 50% of Raider Corporation, an S corporation. Both individuals actively participate in Raider's business. On January 1, Monte and Allie have adjusted bases

Receiver necessary statement-bankruptcy, Receiver necessary statement T...

Receiver necessary statement The receiver may, if necessary, require the statement to be submitted by: Past or present officers of the company Persons who have taken

Compensation, how to treat salary compensation given to an employee how to ...

how to treat salary compensation given to an employee how to show this in company account

Example on investment appraisal method, Q. Example on investment appraisal ...

Q. Example on investment appraisal method ? Contribution per unit = 3·00 - 1·65 = $1·35 per unit Total annual contribution = 20000 × 1·35 = $27000 per year Annual cash fl

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd