Wornell Industries is currently purchasing part no. 456 from an outside supplier for $90 per unit. Because of supplier reliability problems, the company is considering producing the part internally in a currently idle manufacturing plant. Annual volume over the next five years is expected to total 400,000 units at variable manufacturing costs of $88 per unit.
Wornell must acquire $200,000 of new equipment if it reopens the plant. The equipment has a five-year service life, a $20,000 salvage value, and will be depreciated by the straight-line method. Normal equipment maintenance is expected to total $12,000 in year 4, and the equipment will be sold at the end of its life for $20,000, which represents $20,000 gain.
Required:
Rounding to the nearest dollar, use the net-present-value method (total-cost approach) and a 12% after-tax hurdle rate to determine whether Wornell should make or buy part no. 456. The company is subject to a 30% income tax rate.
Wornell is better off to make part no. 456.

Question

Quizplus · Accepted Answer

The Answer of Wornell Industries is currently purchasing part no. 456 from an outside supplier for $90 per unit. Because of supplier reliability problems, the company is considering producing the part internally in a currently idle manufacturing plant. Annual volume over the next five years is expected to total 400,000 units at variable manufacturing costs of $88 per unit.
Wornell must acquire $200,000 of new equipment if it reopens the plant. The equipment has a five-year service life, a $20,000 salvage value, and will be depreciated by the straight-line method. Normal equipment maintenance is expected to total $12,000 in year 4, and the equipment will be sold at the end of its life for $20,000, which represents $20,000 gain.
Required:
Rounding to the nearest dollar, use the net-present-value method (total-cost approach) and a 12% after-tax hurdle rate to determine whether Wornell should make or buy part no. 456. The company is subject to a 30% income tax rate.
Wornell is better off to make part no. 456.

Wornell Industries Is Currently Purchasing Part No