ACME Corporation produces a variety of products for its diverse customer base, including the jet-powered pogo stick and jet-propelled tennis shoes, both of which are essential for catching roadrunners. Currently, they produce 40,000 engines per year that are used in the production of these two products. As the production manager for thisproduct line, you have determined that last year’s costs to produce the engines included: $99,600 in direct material expenses, $298,800 in direct labor expenses, $224,100 in variable overhead costs (i.e. power to operate the equipment), and $116,200 in fixed overhead costs (i.e. utilities to keep the factory operational). ACME plans to produce these engines only for the next 6 years. If they produce the engines in-house, they anticipate that direct material costs will increase at a rate of 5% each year. Further, they anticipate that labor costs will increase at a rate of 6% per year and variable overhead costs will increase at a rate of 3% per year. Fixed overhead costs are anticipated to remain unchanged during this period. However, ACME is also considering outsourcing the production of the engines to another local supplier. They have received a quote from the NADIR Company who has offered to sell ACME 40,000 engines per year at a cost of $24 per engine. This cost will remain unchanged over the next 6 years. If ACME accepts this offer, they can repurpose some of their existing production space and rent the space for $39,000 per year. Further, the fixed overhead costs for the remaining production facility will be reduced by $2.75 per engine produced. ACME’s MARR is 9%. Should ACME accept the offer from NADIR to outsource the engines? Support your answer by calculating the unit cost of each option
E4
ACME Corporation produces a variety of products for its diverse customer base, including the jet-powered pogo stick and jet-propelled tennis shoes, both of which are essential for catching roadrunners. Currently, they produce 40,000 engines per year that are used in the production of these two products. As the production manager for thisproduct line, you have determined that last year’s costs to produce the engines included: $99,600 in direct material expenses, $298,800 in direct labor expenses, $224,100 in variable overhead costs (i.e. power to operate the equipment), and $116,200 in fixed overhead costs (i.e. utilities to keep the factory operational).
ACME plans to produce these engines only for the next 6 years. If they produce the engines in-house, they anticipate that direct material costs will increase at a rate of 5% each year. Further, they anticipate that labor costs will increase at a rate of 6% per year and variable overhead costs will increase at a rate of 3% per year. Fixed overhead costs are anticipated to remain unchanged during this period.
However, ACME is also considering outsourcing the production of the engines to another local supplier. They have received a quote from the NADIR Company who has offered to sell ACME 40,000 engines per year at a cost of $24 per engine. This cost will remain unchanged over the next 6 years. If ACME accepts this offer, they can repurpose some of their existing production space and rent the space for $39,000 per year. Further, the fixed overhead costs for the remaining production facility will be reduced by $2.75 per engine produced. ACME’s MARR is 9%.
Should ACME accept the offer from NADIR to outsource the engines? Support your answer by calculating the unit cost of each option
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 4 images
