Question

Guardian is a national manufacturing company of home health care appliances. It is faced with a make-or-buy decision. A newly engineered lift can be installed in a car trunk to raise and lower a wheelchair. The steel arm of the lift can be purchased internationally for $3.50 per unit or made in-house. If manufactured on site, two machines will be required. Machine A is estimated to cost $18,000, have a life of 6 years, and have a $2000 salvage value; machine B will cost $12,000, have a life of 4 years, and have a $?500 salvage value (carry-away cost). Machine A will require an overhaul after 3 years costing $3000. The annual operating cost for machine A is expected to be $6000 per year and for machine, B is $5000 per year. A total of four operators will be required for the two machines at a rate of $12.50 per hour per operator. In a normal 8-hour period, the operators and two machines can produce parts sufficient to manufacture 1,000 units. Use a MARR of 15% per year to determine the following.

(a) Number of units to manufacture each year to justify the in-house (make) option.

(b) The maximum capital expense justifiable to purchase machine A, assuming all other estimates for machines A and B are as stated. The company expects to produce 10,000 units per year.

Answer 1

a)

Let x as the number of lifts produced per year.

There are 2 costs involve Variable for the operators and fixed costs for the two machines for make or buy decision

Annual Variable Cost =cost per unit x unit per year

                                 = 4 operators * $ 12.5 per hours * 8 hours will produce 1000 units

                                 = (4 * 12.5 * 8 x)/1000

                                = 0.4x

The annual fixed costs for machines A and B are the MC amounts.

Total Cost = MC_A + MC_B+ VC

MC_A=18,000(A P,15%,6) + 2000(A F,15%,6) - 6000 - 3000(P F,15%,3)(A P,15%,6)

MC_B = - 12,000(A P,15%,4) - 500(A F,15%,4) - 5000

Total cost is the sum of MC_A, MC_B, and VC.       

3.. Equating the annual costs of the buy option (3.50x) and the make option yields - 3.50x = MC_A +MC_B - VC = 18,000(A P,15%,6) +2000(A F,15%,6) - 6000 -3000(P F,15%,3)(A P,15%,6) - 12,000(A P,15%,4) - 500(A F,15%,4) – 5000 - 0.4x - 3.10x= - 20,352 x = 6565 units per year

b) Substitute 10,000 for x and PA for the to-be-determined first cost of machine A (currently $18,000) in Equation [13.5]. Solution yields PA $58,295. This is approximately three times the estimated first cost of $18,000, because the production of 10,000 per year is considerably larger than the breakeven amount of 6565.