BREAK EVEN ANALYSIS

Southern Environmental Consulting(SEC), Inc. designs plans and specifications for asbestos abatement(removal) projects inpublic, private, and government buildings.Currently, SEC must conduct an air test before allowing the occupancy of a building after the asbestos has been removed. SEC subcontractsair-test samples to a laboratory for analysis by transmission electron microscopy(TEM). To offset the cost of TEManalysis, SEC charges its clients $100 more than thesubcontractor's fee. The only expenses in this system are the costs of shipping theair-test samples to the subcontractor and the labor involved in shipping the samples. With the growth of thebusiness, SEC must consider either continuing to subcontract the TEM analysis to outside companies or developing its own TEM laboratory. Because of the passage of the Asbestos Hazard Emergency Response Act(AHERA) by the U.S.Congress, SEC expects about1,000 air-sample tests per year over eight years. Thefirm's MARR is known to be 15%.

(a) Determine the cost of anair-sample test by the TEM laboratory(in-house).

The unit cost is ____.

(b) Determine the break even cost.

Additional information.

Description of alternatives are as below:

Subcontract option: The client is charged $400 persample, which is $100 above the subcontracting fee of $300. Labor expenses are $1,500 peryear, and shipping expenses are estimated to be $0.50 per sample.

TEM purchase option: The purchase and installation cost for the TEM is $415,000.The equipment would last for eightyears, at which time it would have no salvage value. The design and renovation cost is estimated to be $9,500 and it is paid only once along with the installation cost. The client is charged $300 per sample based on the current market price. Onefull-time manager and twopart-time technicians are needed to operate the laboratory. Their combined annual salaries will be $50,000. Material required to operate the lab includes carbonrods, coppergrids, filterequipment, and acetone. The costs of these materials are estimated at $6,000 per year. Utilitycosts, operating and maintenancecosts, and the indirect labor needed to maintain the lab are estimated at $18,000 per year. The extraincome-tax expenses would be $20,000.