Bloomfield Inc. manufactures widgets.A major piece of equipment used to make the widget is nearing the end of its useful life. The company is trying to decide whether they should lease new equipment and continue to make the widget or whether the company should accept an offer from Park Inc., an external supplier, to provide the widgets.The current costs to produce one widget, based on annual production of 40,000 units, are as follows:

Direct materials

$5.50

Direct labour

8.00

Variable overhead

1.20

Fixed overhead

7.30

The breakdown of the fixed overhead is:

Supervision:$1.50

Depreciation:$1.80

General overhead: $4.00

The options available to the company are as follows:

1.Rent new equipment for producing widgets for $120,000 per year.

2.Purchase the widgets from an outside supplier (Park Inc.) for $17.00. per unit.

The new equipment would be more efficient than the existing equipment which would reduce the direct labour cost by 25% and the variable overhead cost by 20%.Material cost per unit would be unaffected.The cost for supervision would not change if the new equipment is purchased. If the widget is outsourced, the cost for supervision would be eliminated.The general overhead would not change under either alternative.The widget currently sells for $32.00 per unit.

Required:

1.Assume that 40,000 widgets are produced each year.Which course of action would you recommend?Provide a full quantitative analysis.

2.Calculate the point of indifference between the two alternatives.

Assume, now, that the company can use the new equipment to produce a new product, the gadget.If produced, the gadget will have a unit selling price of $18.00. Variable costs are estimated to be $12.00 and up to 10,000 units could be produced.Under this scenario, the company would lease the new equipment to produce the gadget and outsource the production of the widget.The company feels that widget sales will increase by 5% per year into the foreseeable future while gadget sales will remain around 10,0000 units per year over the same timeframe.The same fixed costs would apply under either alternative.Should the company follow this course of action?