Colgate Printing Co. (CPC) has the book binding contract for the Ralph Brown library. The library pays $25 per
book to CPC. CPC binds 1,000 books every year for the library. Ralph Brown library is considering the option of
binding the books in-house in the basement of the library complex. In order to do this, the library would have
to invest in a binding machine and other printing equipment at a cost of $100,000. The useful life of the machine
is 12 years, at the end of which time, the machine is estimated to have a salvage value of $12,000. The annual
operating and maintenance costs of the machine are estimated to be $10,000.
(a) Assuming an interest rate of 6%, what is the cost of binding per book for the in-house option?
(b) What annual volume of books in need of binding would make both the options (in-house versus
subcontracting) equivalent?

Question

Quizplus · Accepted Answer

The Answer of Colgate Printing Co. (CPC) has the book binding contract for the Ralph Brown library. The library pays $25 per
book to CPC. CPC binds 1,000 books every year for the library. Ralph Brown library is considering the option of
binding the books in-house in the basement of the library complex. In order to do this, the library would have
to invest in a binding machine and other printing equipment at a cost of $100,000. The useful life of the machine
is 12 years, at the end of which time, the machine is estimated to have a salvage value of $12,000. The annual
operating and maintenance costs of the machine are estimated to be $10,000.
(a) Assuming an interest rate of 6%, what is the cost of binding per book for the in-house option?
(b) What annual volume of books in need of binding would make both the options (in-house versus
subcontracting) equivalent?