1. Tandy Teck manufactures an electronic component for a high-end computer. The company currently sells 50,000 units a year at a price of $280 per unit. These units are produced using a machine that was purchased five years ago at a cost of $1.5 million. It currently has a book value of $750,000; however, due to its specialized nature, it has a market value today of only $85,000. The machine, which is expected to last another five years, will have no salvage value. The costs to produce an electronic component are as follows:

Direct material $ 25

Direct labour (4 hours $45/hour) $180

Variable overhead (4 hours $4/hour) $16

Fixed overhead (4 hours $5/hour) $20

Total cost per unit $241

The company expects the following changes for next year:

1. The unit selling price will increase by 5%.
2. Direct labour rates will increase by 20%.

Management is currently considering the replacement of the companys old machine with a new one that would cost $3.5 million. The new machine is expected to last five years and to have a salvage value of $75,000. By using the new machine, management expects to cut variable direct labour to three hours per unit, and sales are expected to increase to 52,000 units and remain at that level, but the company will have to hire an operator for the machine at $120,000 per year.

2. Vanes College provides its own housekeeping services. The College director would like to outsource this service and has found a company that will provide the service for $54 per hour. The following information has been collected about the cost per hour to the college for performing its own housekeeping services:

Cost per hour of service:

Cleaning supplies $5

Direct labour costs $32

Variable overhead $2

Total hours of housekeeping services per year 4,000

Total fixed overhead $40,000

Instructions

a. Determine whether Vanes College should outsource housekeeping, assuming that 75% of fixed costs can be eliminated if the service is outsourced. Provide calculations to support your answer.

a. $(30,000)

b. At what level of service (in hours) would Vanes generally be indifferent between providing housekeeping services or outsourcing them, assuming that 50% of fixed costs can be eliminated?

b. 2,000 hours

Describe two qualitative factors that might affect this outsourcing decision