Question
A company is considering the feasibility of manufacturing one of the components needed for its finished product rather than purchasing it from an outside supplier.
A company is considering the feasibility of manufacturing one of the components needed for its finished product rather than purchasing it from an outside supplier. Its present supplier has just announced that he will increase the price from $100 to $125 per unit. The equipment needed to make this product can be purchased for $1,200,000 and is expected to have salvage value of $300,000 at the end of 6th year. Additional fixed costs excluding depreciation are estimated to increase by $100,000. Variable cost of manufacturing each unit will be $30. Straight line depreciation will be used. Cost of capital is 15% and tax rate is 50%. Annual projected sales are 7,500 units per year for next 6 years. Advice the company whether they should make or buy the product. Will your answer be different if company sells 6000 units per year?
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