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Problem 1 (5) For this problem, assume the qualitative considerations are irrelevant. We currently make Part WDS-73 on a single machine in a dedicated room
Problem 1 (5) For this problem, assume the qualitative considerations are irrelevant. We currently make Part WDS-73 on a single machine in a dedicated room in a larger facility. Reported unit costs for Part WDS-73 from our traditional system are: Direct materials $3.10 Direct labor $2.70 Variable manufacturing overhead $0.60 Supervision $1.50 $60,000 annual salary Equipment depreciation $1.00 $40,000 annually Rent $0.30 $12,000 annually Total reported unit cost (GAAP) $9.20 The rent is the portion of facility rent that we allocate to the WDS-73 production line. The supervisor for WDS-73 production does not have any other responsibilities and would retire if WDS-73 production ends. The company would leave the equipment in place unless it had another use for the space, in which case it would sell the equipment for a net-zero cash flow effect. A. How would our cash flows change if we outsourced Part WDS-73 from a supplier willing to charge $8.40 per unit and left the space and equipment idle? B. Should we make Part WDS-73 in house or outsource it from a supplier willing to charge $8.40 per unit, given that we can sub-let the space the Part WDS-73 production line occupies to a third party for $50,000? Keep in mind that we estimate the qualitative benefits (minus qualitative costs) of making Part WDS-73 to be worth approximately $20,000 each year
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