The Obama Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier. New equipment for producing the subassemblies can be purchased at a cost of $400,000. The equipment would have a five-year useful life (the company uses straight-line depreciation) and a $50,000 salvage value. Alternatively, the subassemblies could be purchased from an outside supplier. The supplier has offered to provide the subassemblies for $9 each under a five-year contract. Obama Company's present costs per unit of producing the subassemblies internally (with the old equipment) are given below. The costs are based on a current activity level of 40,000 subassemblies per year: The new equipment would be more efficient and would reduce direct labour costs and variable overhead costs by 25%. Supervision cost and direct materials cost per unit would not be affected by the new equipment. The company has no other use for the space now being used to produce the subassemblies. The company's total general company overhead would not be affected by this decision. Required: 1. Compute the relevant cost per unit of the decision to make the subassemblies internally

2. What is the relevant cost of the decision to purchase the subassemblies from the outside?

3. Compare the two solutions. Show all your calculations.

4. Which option do you recommend? Why?

5. Provide 2 qualitative factors to be considered in the decision to make or purchase from outside supplier.

W Adm2341 A Quiz 3 (Compatibility Model Search in Document sert Design Layout References Mailings Review Home View Times New Ro AaBb AaBbCcDd spacing Heading Heading 2 Tite Subtitle Styl Question 1 (10 points) The Obama Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier New equipment for producing the subassemblies can be purchased at a cost of $400,000. The equipment would have a five-year useful life (the company uses straight-line depreciation) and a $50,000 salvage value Alternatively, the subassemblies could be purchased from an outside supplier. The supplier has offered to provide the subassemblies for $9 each under a five-year contract. Obama Company's present costs per unit of producing the subassemblies internally (with the old equipment) are given below. The costs are based on a current activity level of 40,000 subassemblies per year: $3.00 Direct Materials Direct Labour $4.20 $0.60 ariable Overhead Fixed Overhead ($0.80 supervision, $0.90 depreciation, and$2 general company overhead) 70 Total Cost per Unit The new equipment would be more efficient and would reduce direct labour costs and variable overhead costs by 25%. Supervision co and direct materials cost per una would not be affected by the new equipment. The company has no other use for the space now being used to produce the subassemblies. The company's total general company overhead would not be affected by this decision Required: 1. Compute the relevant cost per un of the decision to make the subassemblies internally 2. What is the relevant cost of the decision to purchase the subassemblies from the outside 3. Compare the two solutions. Show all your calculations 4. Which option do you recommend? Why? 5. Provide 2 qualitative factors to be considered in decision to the make or purchase from outside supplier Page 2 of 3 643 Words English (US 23%