Hyatt Company

The Hyatt Company is trying to decide whether it should purchase new equipment and continue to make its sub-assemblies internally or if production should be discontinued and the sub-assembly purchased from an outside supplier New equipment for producing the sub-assemblies can be purchased at a cost of $400,000. The equipment would have a five-year useful life (the company uses straight-line depreciation) and a $50,000 salvage value Alternatively, the sub-assemblies could be purchased from an outside supplier. The supplier has offered to provide the sub-assemblies for $9 each under a five-year contract. Hyatt Company's present costs per unit of producing the sub-assemblies internally (with the old equipment) are given below. The costs are based on a current activity level of 40,000 sub-assemblies per year Direct Materials Direct Labour Variable Overhead Fixed Overhead ($0.80 supervision, $0.90 depreciation, 3.00 $4.20 S0.60 and $2 general company overhead) Total Cost per Unit $3.70 S1150 The new equipment would be more efficient and would reduce direct labour costs and variable overhead costs by 25%. Supervision cost ($30,000 per year) and direct materials cost per unit would not be affected by the new equipment. The company has no other use for the space now being used to produce the sub-assemblies. The company's total general company overhead would not be affected by this decision. Assume direct labour is a variable cost Required Assume that 40,000 sub-assemblies are needed each year. Prepare an analysis of the two alternatives and make a recommendation to the management of the company of the appropriate course of action