(Make-or-buy decision) Larson Building Systems manufactures steel buildings for agricultural and commercial applications. Currently, the company is trying to decide between two alternatives regarding a major overhead door assembly for the company’s buildings. The alternatives are

#1: Purchase new equipment at a cost of $5,000,000. The equipment would have a 5-year life and no salvage value. Larson Building Systems uses straight-line depreciation and allocates that amount on a per-unit-of- production basis.

#2: Purchase the door assemblies from an outside vendor who will sell them for $240 each under a 5-year contract. Larson’s present cost of producing the door assemblies is given below. The costs are based on current and normal activity of 50,000 units per year.

The new equipment would be more efficient than the old and would reduce direct labor costs and variable overhead costs by 25 percent. Supervisory costs of $350,000 would be unaffected. The new equipment would have a capacity of 75,000 units per year. The space occupied by subassembly production could be leased by Larson to another firm for $114,000 per year if the company decides to buy from the outside vendor.

a. Show an analysis, including relevant unit and total costs, for each alternative. Assume 50,000 subassemblies are needed each year.

b. How would your answer differ if 60,000 subassemblies were needed?

c. How would your answer differ if 75,000 subassemblies were needed?

d. In addition to quantitative factors, what factors should be considered?LO1

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Variable overhead Direct material Direct labor Fixed overhead* Total $139 66 43 36 $284