Question

“That old equipment for producing carburetors is worn out,” said Bill Seebach, president of Hondrich 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 carburetors internally or whether it should discontinue production of its carburetors and purchase them from an outside supplier. The alternatives follow:

     Alternative 1: Rent new equipment for producing the carburetors for $176,000 per year.
     Alternative 2: Purchase carburetors from an outside supplier for $20.70 each.

     Hondrich Company’s costs per unit of producing the carburetors internally (with the old equipment) are given below. These costs are based on a current activity level of 32,000 units per year:

Direct materials	$	5.70
Direct labour		10.00
Variable overhead		2.00
Fixed overhead ($2.75 supervision, $1.80 depreciation,     and $4.00 general company overhead)		8.55
Total cost per unit	$	26.25

     The new equipment would be more efficient and, according to the manufacturer, would reduce direct labour costs and variable overhead costs by 25%. Supervision cost ($88,000 per year) and direct materials cost per unit would not be affected by the new equipment. The new equipment’s capacity would be 50,000 carburetors per year.

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

Required:
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 32,000 carburetors are needed each year.

a. What will be the total relevant cost of 32,000 subassemblies if they are manufactured internally as compared to being purchased?

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

c. Which course of action would you recommend to the president?

• Indifferent between the two alternatives

• Manufacture internally

• Purchase from the outside supplier

2. 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.

a-1. What will be the total relevant cost of 44,000 subassemblies if they are manufactured internally?

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

a-3. Which course of action would you recommend if 44,000 assemblies are needed each year?

• Purchase from the outside supplier

• Manufacture internally

• Indifferent between the two alternatives

b-1. What will be the total relevant cost of 50,000 subassemblies if they are manufactured internally?

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

b-3. Which course of action would you recommend if 50,000 assemblies are needed each year?

• Purchase from the outside supplier

• Indifferent between the two alternatives

• Manufacture internally

3. Not available in Connect.

Answer 1

After taking new machinery the cost will be
particular	old cost /unit $	cost reduction	new cost / unit $
	A	B	a*(1-B)
Direct material	5.7	0	5.7
Direct labour	10	25%	7.5
Variable overhead	2	25%	1.5

What will be the total relevant cost of 32,000 subassemblies if they are manufactured internally as compared to being purchased?

Particular	Cost	Amount $	Amount $
Direct material	$5.7	$ 182400
Direct labour	$7.5	$ 240000
Variable overhead	$1.5	$ 48000	$470400
Add - fixed overhead
Rent new equipment		$176000
Supervision ($2.75*32000)		$88000	$264000
Total cost			$734400
subassemblies Produce			32000
cost per subassemblies $734400/32000			$22.95

so manufacturing cost for per subassemblies are $22.95

Purchase cost from an outside supplier for $20.70 each.

so if co puchase from outside saving will be $2.25 per subassemblie , so co sgould go for purchase from outside option .

1- B )What would be the per unit cost of the each subassembly manufactured internally = $ 22.95 (above )

1 - C) Which course of action would you recommend to the president? - co. should go for purchase outside

2 ) cost for 44000 subassembliy

Particular	Cost	Amount $	Amount $
Direct material	$5.7	$ 250800
Direct labour	$7.5	$ 330000
Variable overhead	$1.5	$ 66000	$ 646800
Add - fixed overhead
Rent new equipment		$176000
Supervision		$88000	$264000
Total cost			$ 910800
subassemblies Produce			44000
cost per subassemblies $910800/44000			$20.70

so manufacturing cost for per subassemblies are $20.70

Purchase cost from an outside supplier for $20.70 each.

here in both option cost per subassembly is same so cand can go for purchase from outside or can manufacture

2 ) cost for 50000subassembliy

Particular	Cost	Amount $	Amount $
Direct material	$5.7	$ 285000
Direct labour	$7.5	$ 375000
Variable overhead	$1.5	$ 75000	$ 735000
Add - fixed overhead
Rent new equipment		$176000
Supervision		$88000	$264000
Total cost			$ 999000
subassemblies Produce			50000
cost per subassemblies $999000 / 50000			$19.98

so manufacturing cost for per subassemblies are $19.98

Purchase cost from an outside supplier for $20.70 each.

in this situation co should manufacture because if purchase from outside co . pay $0.72 more per subassembly as compare to manufacture