Question 1 (5 marks) "That old equipment for producing subassemblies is worn out," said Paul Taylor, President of Timkin Company. "We need to make a decision quickly." The company is trying to decide whether it should purchase new equipment and continue to make its subassemblies or purchase them from an outside supplier. The alternatives follow: Alternative 1: New equipment for producing the subassemblies can be acquired for $60,000 per year. Alternative 2: The subassemblies can be purchased from an outside supplier who has offered to provide them for $8 each. Timkin Company's present costs per unit of producing the subassemblies internally (with the old equipment) are given below. These costs are based on a current activity level of 40,000 subassemblies per year: Direct materials.. Direct labour Variable Overhead.. Fixed overhead/unit ($0.75 supervision, $0.90 old equipment depreciation & $2 allocated general company overhead Total cost per unit. $3.75 4.00 0.60 3.65 $12.00 The new equipment would be more efficient and, according to the manufacturer, would reduce direct labour costs and variable overhead costs by 25%. Required: The president is unsure what the company should do and would like an analysis showing what unit costs under each of the two alternatives given above. Assume that 40,000 subassemblies are needed each year. Which course of action would you recommend to the president? Hint: Using per unit data may be more friendly. TOTAL Make/Unit. Difference Buy/Unit