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:

  

Alternative 1:	Rent new equipment for producing the subassemblies for $60,000 per year.
Alternative 2:	Purchase subassemblies from an outside supplier for $9 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 30,000 subassemblies per year:

   

Direct materials	$	2.19
Direct labor		5.00
Variable overhead		0.70
Fixed overhead ($1.00 supervision, $1.00 depreciation,   and $3 general company overhead)		5.00
Total cost per unit	$	12.89

  

The new equipment would be more efficient and, according to the manufacturer, would reduce direct labor costs and variable overhead costs by 20%. 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 total general company overhead would be unaffected by this decision.

  

Required:
1.	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 30,000 subassemblies are needed each year.

  

a.	What will be the total relevant cost of 30,000 subassemblies if they are manufactured internally as compared to being purchased? (Do not round intermediate calculations.)

  

b.	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.)

    

c.	Which course of action would you recommend to the president?
	Manufacture internally Purchase from the outside supplier Indifferent between the two alternatives

  

2a-1.	What will be the total relevant cost of 40,000 subassemblies if they are manufactured internally? (Do not round intermediate calculations.)

    

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

   

2a-3.	Which course of action would you recommend if 40,000 subassemblies are needed each year?
	Indifferent between the two alternatives Purchase from the outside supplier Manufacture internally

  

2b-1.	What will be the total relevant cost of 50,000 subassemblies if they are manufactured internally? (Do not round intermediate calculations.)

   

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

  

2b-3.	Which course of action would you recommend if 50,000 subassemblies are needed each year?
	Manufacture internally Indifferent between the two alternatives Purchase from the outside supplier

Answer 1

1
a.	The relevant cost is 382500 - 360000 = 22500 of manufactured intenally based on current equipment as compared to being purchased.
Relevant Cost	Per unit	Total
Variable Cost differential(9-6.75)	-2.25	-67500
Supervision	1	30000
Rent	2	60000
Per unit	0.75	22500
b	The total cost of each sub unit manufactured internally will be 12.75 per unit and total cost will be 382500 for 30000 units
c	It is recommended to go with purchase from the outisde supplier as the total cost is lower by 22500
2A
1	The relevant cost is 0 as this is indifferent point
Variable Cost differential(9-6.75)	-2.25	-90000
Supervision	1	30000
Rent	2	60000
Per unit	0.75	0
2	Per unit cost is 11.25
3	Indifferent between the two alternatives
2B
1	The relevant cost is-22500 as this is indifferent point
Variable Cost differential(9-6.75)	-2.25	-112500
Supervision	1	30000
Rent	2	60000
Per unit	0.75	-22500
2	Per unit cost is 10.35
3	Manufacture internally Statement showing Costing of all options 30000 40000 50000 Current Rent New equipmemnt Outsource Current Rent New equipmemnt Outsource Current Rent New equipmemnt Outsource Particulars Unit cost Total cost Unit cost Total cost Unit cost Total cost Unit cost Total cost Unit cost Total cost Unit cost Total cost Unit cost Total cost Unit cost Total cost Unit cost Total cost Direct Material 2.19 65700 2.19 65700 9 270000 2.19 87600 2.19 87600 9 360000 2.19 109500 2.19 109500 9 450000 Direct Labour 5 150000 4 120000 5 200000 4 160000 5 250000 4 200000 Variable Overhead 0.7 21000 0.56 16800 0.7 28000 0.56 22400 0.7 35000 0.56 28000 Total Variable cost 7.89 236700 6.75 202500 9 270000 7.89 315600 6.75 270000 9 360000 7.89 394500 6.75 337500 9 450000 Fixed Overhead Supervision 30000 30000 0 0 30000 30000 0 0 30000 30000 0 0 Depreciation 30000 0 0 0 30000 0 0 0 30000 0 0 0 Rent 0 60000 0 0 0 60000 0 0 0 60000 0 0 General Overhead 90000 90000 90000 90000 90000 90000 90000 90000 90000 Total Fixed Cost 150000 180000 90000 150000 180000 90000 150000 180000 90000 Total Cost 12.89 386700 12.75 382500 12 360000 11.64 465600 11.25 450000 11.25 450000 10.89 544500 10.35 517500 10.8 540000