Question
a. Exercise #1: (Make or Buy) S Company needs about 200,000 units of a component each year for the next 5 years to use in
a. Exercise #1: (Make or Buy) S Company needs about 200,000 units of a component each year for the next 5 years to use in manufacturing a variety of products. It is considering three different alternatives as follows: Alternative #1: It can buy the components from a vendor at a cost of $2 each. Alternative #2: It can purchase machinery costing $675,000 and be able to make the units itself for a cost of $.65 each. (This machine would have a 5-year life with no salvage, so would result in $135,000 fixed cost, straight-line depreciation each year.) Cash costs to operate and maintain the machine would be $10,000 per year for each of the 5 years. Alternative #3: It can purchase machinery costing $1,030,000 and be able to make the units itself for a cost of $.30 each. (This machine would have a 5-year life with no salvage, so would result in $204,000 fixed cost, straight-line depreciation each year.) Cash costs to operate and maintain this machine would be $12,000 per year for each of the 5 years. REQUIRED: (a) Provide a relevant cost analysis providing dollar amounts to consider for each of the three alternatives. (b) Then write a sentence telling which alternative should be chosen. (c) Then write several sentences explaining why you are recommending that particular alternative AND including the dollar advantage over the second best option. (NOTE: For this exercise, ignore income tax effects and the time value of money.)
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