QUESTION FOUR "That old equipment for producing subassemblies is worn out", said Mr. Paul Adom, president of Ebeyeyie Ghana Limited (EGL). "We need to make a decision quickly". The company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or whether it should discontinue production of its subassemblies and purchase them from an outside supplier. The alternatives are: Alternative 1: New equipment for producing the subassemblies can be purchased at a cost of GH¢1,750,000. The equipment would have a five-year useful life (the company uses straight-line depreciation method) and a GH¢250,000 salvage value. Alternative 2: Page 5 of 6 The subassemblies can be purchased from an outside supplier who has offered to provide them for GH¢40 each under a five-year contract. EGL's present costs per unit of producing the subassemblies internally (with the old equipment) are given below. These costs are based on a current activity level of 200,000 subassemblies per year: GH¢ Direct materials 13.75 Direct labour 20.00 Variable overhead 3.00 Fixed overhead (GH¢3.75 supervision, GH¢4.50 Depreciation, and GH¢10 general company overhead) 18.25 Total cost per unit 55.00 The new equipment would be more efficient and, according to the manufacturer, would reduce direct labour costs and variable overhead costs by 25%. Supervision cost (GH¢150,000 per year) and direct materials cost per unit would not be affected by the new equipment. The new equipment's capacity would be 300,000 subassemblies per year. The company has no other use for the space now being used to produce subassemblies. REQUIRED: (A) The president is unsure what the company should do and would like an analysis showing what unit costs and what total costs would be under each of the two alternatives given above. Assume that 40,000 subassemblies needed each year. Which course of action would you recommend to the president and why? (B) Would your recommendation in (a) above be the same if the company's needs were: (i) 250,000 subassemblies per year, or (ii) 300,000 subassemblies per year? Show computations in good form. (C) What qualitative factors would you recommend that the company consider before deciding?