Case 15 - OUTSOURCING (20 pts) Modern Steels Corporation manufactures steel buildings for agricultural and commercial applications. Currently, it is trying to decide between two alternatives regarding a major overhead door assembly for the company's buildings. The alternatives are as follows: Option 1: Purchase new equipment with a five-year life and no salvage value at a cost of P5,000,000. Modern Steels uses straight line depreciation and allocates that amount on a per unit of production basis. Option 2: Purchase the assemblies from an outside supplier who will sell them for P240 each under a five- year contract. Following is Modern Steels Corp's present cost to produce one door assembly based on current and normal activity of 50,000 units per year: Direct Materials Direct labor Variable overhead Fixed overhead Total P 139 66 43 36 (which include P7 supervision cost and P20 general overhead) P 284 The new equipment would be more efficient than the old equipment and would reduce direct labor costs and variable overhead costs by 25%. Supervisory costs of P350,000 would be unaffected. The new equipment would have a capacity of 75,000 assemblies per year. Modern Steels couldlease the space occupied by current assembly production to another firm for P1 14,000 per year if the company decides to buy from the outside vendor. REQUIRED: a) Show an analysis, including relevant unit and total costs, for each alternative of producing or buying the assemblies. Assume 50,000 assemblies are needed each year. b) How would your answer differ if 60,000 assemblies were needed? c) In addition to quantitative factors, what qualitative factors should be considered? Case 15 - OUTSOURCING (20 pts) Modern Steels Corporation manufactures steel buildings for agricultural and commercial applications. Currently, it is trying to decide between two alternatives regarding a major overhead door assembly for the company's buildings. The alternatives are as follows: Option 1: Purchase new equipment with a five-year life and no salvage value at a cost of P5,000,000. Modern Steels uses straight line depreciation and allocates that amount on a per unit of production basis. Option 2: Purchase the assemblies from an outside supplier who will sell them for P240 each under a five- year contract. Following is Modern Steels Corp's present cost to produce one door assembly based on current and normal activity of 50,000 units per year: Direct Materials Direct labor Variable overhead Fixed overhead Total P 139 66 43 36 (which include P7 supervision cost and P20 general overhead) P 284 The new equipment would be more efficient than the old equipment and would reduce direct labor costs and variable overhead costs by 25%. Supervisory costs of P350,000 would be unaffected. The new equipment would have a capacity of 75,000 assemblies per year. Modern Steels couldlease the space occupied by current assembly production to another firm for P1 14,000 per year if the company decides to buy from the outside vendor. REQUIRED: a) Show an analysis, including relevant unit and total costs, for each alternative of producing or buying the assemblies. Assume 50,000 assemblies are needed each year. b) How would your answer differ if 60,000 assemblies were needed? c) In addition to quantitative factors, what qualitative factors should be considered