Exercise 5
	ACCT 301 Week 7 HW
Part 1	Payback period
	Nixon Harvesting is considering the purchase of a new tractor. The tractor costs $280,824, and has a 5-year life. The company uses the straight-line depreciation method, and the tractor has no residual value. The tractor will produce net cash inflows of $66,667 per year at the end of each year. For purposes of responding to each requirement below, you may assume no income taxes.
A	Calculate the payback period for the tractor investment.
Part 2	Outsourcing
	Pure Comfort manufactures and sells mattresses with adjustable air chambers. Pure Comfort has been producing and selling approximately 500,000 units per year. Each units sells for $600, and there are no variable selling, general, or administrative costs. The company has been approached by a foreign supplier who wishes to provide the air compressor component for $90 per unit. Total annual manufacturing costs, including air compressors, is as follows:
		Direct materials	$50,000,000
		Direct labor	80,000,000
		Variable factory overhead	16,000,000
		Fixed factory overhead	35,000,000
	If Pure Comfort outsources the air compressor, it is expected that direct materials will be reduced by 20%, direct labor by 30%, and variable factory overhead by 25%. There will be no reduction in fixed factory overhead.
A	Should Pure Comfort outsource the air compressor? Show computations
B	If outsourcing the air compressor will free up capacity, and enable Pure Comfort to increase production and sales to 600,000 units per year, would it make sense to outsource?
	Show computations
C	What are qualitative factors involved in the decision?