Cranberry Cross Co. (CCC) is currently purchasing components from an outside supplier for $75 per unit. Because of supplier reliability problems, the company is considering producing the component internally in a currently idle manufacturing plant. Annual volume over the next six years is expected to total 200,000 units at variable manufacturing costs of $60 per unit.
CCC must acquire $60,000 of new equipment if it reopens the plant. The equipment has a five-year service life and a $10,000 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance are expected to average $3,000 per year in years 3-5, and the equipment will be sold at the end of its life. The hurdle rate is 10%.
Required:
Use the net-present-value method (total-cost approach) and determine whether CCC should make or buy the component. Ignore income taxes.

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The Answer of Cranberry Cross Co. (CCC) is currently purchasing components from an outside supplier for $75 per unit. Because of supplier reliability problems, the company is considering producing the component internally in a currently idle manufacturing plant. Annual volume over the next six years is expected to total 200,000 units at variable manufacturing costs of $60 per unit.
CCC must acquire $60,000 of new equipment if it reopens the plant. The equipment has a five-year service life and a $10,000 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance are expected to average $3,000 per year in years 3-5, and the equipment will be sold at the end of its life. The hurdle rate is 10%.
Required:
Use the net-present-value method (total-cost approach) and determine whether CCC should make or buy the component. Ignore income taxes.