j80 Particulars Automatic machine Semi-automatic machine Total variable cost 30,00,000 236,00,000 Plus fixed cost 15,00,000 9,00,000 Total cost 45,00,000 45,00,000 Cost per unit 7.50 7.50 Clearly, at the production volume of greater than 6,00,000 units, total cost per unit would be lower with the automatic machine compared to the semi-automatic machine. P.23.11 Farishta Company Ltd's old equipment for making sub-assemblies is worn-out. The company is considering two courses of action: (a) Completely replacing the old equipment with a new equipment, (b) Buying sub-assemblies from a reliable outside supplier who has quoted a unit price of P10 on a 7-year contract for a minimum of 50,000 units per year. Production was 60,000 units in each of the past two years. Future needs for the next 7 years are not expected to fluctuate beyond 50,000 to 70,000 units per year. Cost records for the past 2 years reveal the following unit costs of manufacturing the sub-assemblies: Direct material 22.50 Direct labour 4.00 Variable overheads 1.00 Fixed overheads (including 31.0 for depreciation and 21.0 for supervision and other direct departmental fixed overhead) 2.50 10.00 The new equipment will cost 318,80,000, will last 7 years, and will have a disposal value of 32,00.000 The current disposal value of the old equipment is 1,00,000. The salesman for the new equipment has summarised his position as follows: The increase in machine speed will reduce direct labour and vari- able overhead by 33.50 per unit. Consider last year's experience of one of our major competitors with identical equipment. They produced 1,00,000 units under operating conditions very comparable to us and showed the following unit costs: Direct material 22.50 Direct labour Variable overheads 0.50 Fixed overhead, including 22.40, depreciation 1.00 4.00 8.00 You are required to compare the alternative on a: (1) Total cost basis (11) Per unit basis for annual needs of 60,000 units. Which alternative seems more attractive Assume that any idle facilities cannot be put to alternative use, and also assume that 70.5 of the old Farishta unit cost is allocated fixed overhead that will be unaffected by the decision), Ignore interest and tax cost