K2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $400,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 160,000 units of the equipments product each year. The expected annual income related to this equipment follows.

Sales	$	250,000
Costs
Materials, labor, and overhead (except depreciation)		133,000
Depreciation on new equipment		33,333
Selling and administrative expenses		25,000
Total costs and expenses		191,333
Pretax income		58,667
Income taxes (30%)		17,600
Net income	$	41,067

1.	Compute the payback period. (Round your answer to 2 decimal places.)

Payback period

years

2.	Compute the accounting rate of return for this equipment. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Accounting rate of return

%

Santos Company currently manufactures one of its crucial parts at a cost of $3.80 per unit. This cost is based on a normal production rate of 50,000 units per year. Variable costs are $2.00 per unit, fixed costs related to making this part are $50,000 per year, and allocated fixed costs are $40,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Santos is considering buying the part from a supplier for a quoted price of $3.20 per unit guaranteed for a three-year period.

Calculate the total incremental cost of making 50,000 units. (Omit the "$" sign in your response.)

Total incremental cost

$

Calculate the total incremental cost of buying 50,000 units. (Omit the "$" sign in your response.)

Total incremental cost

$

Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

	Make
	Buy