Question
You are required to decide if the company should make or buy components of a machine they manufacture in-house. The annual interest is 8%. The
You are required to decide if the company should make or buy components of a machine they manufacture in-house. The annual interest is 8%. The information is presented below:
Making the components for this machine in-house:
Expenses incurred on an annual basis
Description | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 |
Plant and equipment | R2 500 |
|
|
|
|
Manufacturing costs |
| R250 | R300 | R350 | R400 |
Opportunity cost (assembly line) |
| R345 | R290 | R300 | R350 |
The machine is decommissioned at the end of the fourth year at zero value.
Cost related to buying these components:
The cost of buying the components is as follows.
Year 0 R0; Year 1 R900; Year 2 R475; Year 3 R800; Year 4 R950.
Question:
Which option is cheaper for the company? Show all the calculations. (25 marks)
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