Question
In: Accounting
Suppose a company needs to decide whether to make or to buy a product. The product...
Suppose a company needs to decide whether to make or
to buy a product. The product can be purchased from the market at a
price of 19 TL per unit. Alternatively, it can be manufactured
in-house, in which case a machine has to be purchased for 120,000
TL to produce the part. The variable (material and labor) costs
will be 10 TL/unit. This product will be needed for the next 5
years, at which time, the machine can be solved at a salvage value
of 20,000 TL.
a) Determine annual break-even (BE) quantity between buying and
making. i=15%.
b) If annual production is 6,000 units, should you make or buy the
product? If the sales price is 25 TL/unit, how much profit is made
per year?
(Note: For Purchasing: TC1=FC+Vc1*Q; For Making:
TC2=FC+Vc2*Q; set
TC1=TC2;
Circle the correct answer and show your calculations.
a) BE=3250; Profit=40560 b) BE=3483; Profit=58653
c) BE=1650; Profit=35682 d) BE=4373; Profit=55763
Solutions
Expert Solution
Ans:
Calculation of break even point :
Machine cost : $120,000
Salvage Value : $20,000
i = 15%
PV factor @15% for 5 years : 0.497
PV of salvage value : $20,000 * 0.497 = $9,940
PV of cost : $120,000 - $9,940 = $110,060
Annuity Factor @15% for 5 years = 3.511
Effective Annual cost : $110,056 / 3.511 = $31,347
Differcial cost of Make or Buy = $19 - $10 = $9
Break Even between make or buy : $31,347 / 9 = 3,483 Units
2.
Sale price : $25
Variable cost : $10
Sales Units : 6,000
Profit = 6,000 ( $25 - $10) - $31,347 = $58,653
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