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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ekkarill92 answered 2 years ago
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