$$That old equipment for producing carburetors is worn out,$$ said Bill Bridge, president of Hondrich

Corporation. $$We need to make a decision quickly.$$ The company is trying to decide whether it should

rent new equipment and continue to make its carburetors internally or whether it should discontinue

production of its carburetors and purchase them from an outside supplier. The alternatives follow:

$$ Alternative $1$: Rent new equipment for producing the carburetors for $$120,000$ per year.

$$ Alternative $2$: Purchase carburetors from an outside supplier for $$16$ each.

Hondrich Corporation$$s costs per unit of producing the carburetors internally $($with the old

equipment$)$ are given below. These costs are based on a current activity level of $40,000$ units per year:

per unit

Direct materials $...............................................................................$ $ $5\mathrm{.}50$

Direct labour.................................................................................... $8\mathrm{.}00$

Variable manufacturing overhead $..................................................1\mathrm{.}20$

Fixed manufacturing overhead $($$$1\mathrm{.}50$ supervision,

$$1\mathrm{.}80$ depreciation, and $$4$ general company overhead$)......7\mathrm{.}30$

Total cost $.........................................................................................$ $ $22\mathrm{.}00$

The new equipment would be more efficient and, according to the manufacturer, would reduce

direct labour costs and variable overhead costs by $25\%.$ Supervision cost $($$$60,000$ per year$)$ and direct

materials cost per unit would not be affected by the new equipment. The new equipment$$s capacity

would be $60,000$ carburetors per year.

The total general company overhead would be unaffected by this decision.

Requirements:

$1.$ Bill Bridge is unsure what the company should do and would like an analysis showing the unit costs

and total costs for each of the two alternatives given above. Assume that $40,000$ carburetors are

needed each year. Which course of action would you recommend to Bill? Show all computations.

$\{$Hint: To simply and organize in an efficient manner, use a table to analyze your decision similar to

the make vs buy tables in Module $14,$ Chapter $10,$ page $526$ of the textbook, being sure to include

all of the relevant costs from this particular decision.$\}$

$2.$ Would your recommendation in $(1)$ above be the same if the company$$s needs were $60,000$

carburetors per year? Show computations in good form. $[$Hint: Basically use the exact same table,

and information as in Part $1,$ but realize that a few of the costs will change due to the change in

volume.$]$

$3.$ What other factors would you recommend that Bill consider before making a decision?