The Mechanical Components Division manager asks you to recommend a make/buy decision on a major automotive subassembly that is currently purchased externally for a total of $3.9 million this year. This cost is expected to continue rising at a rate of $300,000 per year. Your manager asks that both direct and indirect costs be included when in-house manufacturing (make alternative) is evaluated. New equipment will cost $3.2 million, have a salvage of $0.5 million and a life of 6 years. Estimates of materials, labor costs, and other direct costs are $2.3 million, per year. Typical indirect rates, bases, and expected usage are shown. Perform the AW evaluation at MARR = 12% per year over a 6-year study period. Basis Direct labor cost Materials cost Number of inspections Department X Y Z The annual worth for the make decision is $ $2.35 per dollar $0.50 per dollar $20 per inspection The annual worth for the buy decision is $ The (Click to select) alternative is selected. (Click to select) buy make Rate Expected Usage $450,000 $855,000 4,500

The Mechanical Components Division manager asks you to recommend a make/buy decision on a major automotive subassembly that is currently purchased externally for a total of $3.9 million this year. This cost is expected to continue rising at a rate of $300,000 per year. Your manager asks that both direct and indirect costs be included when in-house manufacturing (make alternative) is evaluated. New equipment will cost $3.2 million, have a salvage of $0.5 million and a life of 6 years. Estimates of materials, labor costs, and other direct costs are $2.3 million, per year. Typical indirect rates, bases, and expected usage are shown. Perform the AW evaluation at MARR = 12% per year over a 6-year study period. Basis Direct labor cost Materials cost Number of inspections Department X Y Z The annual worth for the make decision is $ $2.35 per dollar $0.50 per dollar $20 per inspection The annual worth for the buy decision is $ The (Click to select) alternative is selected. (Click to select) buy make Rate Expected Usage $450,000 $855,000 4,500

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Q: Consider a project to supply Detroit with 26,000 tons of machine screws annually for automobile…

A: Step 1: Calculate Revised Operating Cash Flows under Worst-Case and Best Case ScenarioWe will have…

Q: The plant manager at a company would like to perform an analysis for a new $250,000 machine. If she…

A: Payback period method is a traditional method used in capital budgeting decisions which is used to…

Q: You are evaluating a project for a superior pickleball paddle. You estimate the sales price to be…

A: NPV It is a capital budgeting tool to decide on whether the capital project is beneficial for the…

Q: In order to increase production capacity, Global Industries is considering replacement an ex…

A: Net cash outflow is the amount of initial investment in equipment and installation and investment in…

Q: Lou Lewis, the president of Lewisville Company, has asked you to give him an analysis of the best…

A: Evaluating alternatives: When a company is faced with the choice of two alternatives, both…

Q: Lee, Inc. is considering the production of a new line of soft drinks at its Springfield, IL plant.…

A: when a company considers investing in a project, the depreciation charged every year on the…

Q: You are evaluating a product for your company. You estimate the sales price of the product to be…

A: Sale price per unit=$200 Sales volume in Year 1=2,000 units Sales volume in Year 2=5,000 units Sales…

Q: Poly-Chem Plastics is considering two types of injection molding machines: hydraulic and electric.…

A: here to solve this question we have to calculate the IRR of incremental cash flow of both the…

Q: Tanaka Machine Shop is considering a four-year project to improve its production efficiency. Buying…

A: The problem involves the determination of the NPV or the net present value. NPV pertains to the…

Q: The manager of a division that produces add-on products for the automobile industry has just been…

A: Answer - First three subparts are solved here. Part 1 - Computation of the ROI for each…

Q: Lukow Products is investigating the purchase of a piece of automated equipment that will save…

A: Net present value refers to the disparity between the present worth of the inflow of cash and the…

Q: A piece of labor-saving equipment has just come onto the market that Mitsui Electronics, Limited,…

A: Payback Period= Purchase Cost / Annual Cost SavingsNet income = Annual Cost Savings -…

Q: ukow Products is investigating the purchase of a piece of automated equipment that will save…

A: The various alternative methods of capital budgeting are enumerated below:Payback period method.Net…

Q: ing the component (option B). Details of the two options are given below: Option A : Three…

A: In the given question, a component can either be produced in-house or purchased from outside. We…

Q: The Manager of a canned food processing plant is trying to decide between two labelling machines.…

A: Equivalent Annual CostEquivalent Annual Cost (EAC) is a financial measurement employed to assess and…

Q: chester corporation is launching a new product that is expected to cost $75 in direct materials, $50…

A: Variable costing means that inventory is valued at variable manufacturing cost and fixed cost is…

Q: Dexcon Technologies, Inc., is evaluating two alternatives to produce its new plastic filament with…

A: The company may require to evaluate which alternative I beneficial to the company and has low costs.…

Q: Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile…

A: The objective of the question is to calculate the accounting, cash, and financial break-even…

Q: Determine the average rate of return on the equipment, giving effect to straight-line depreciation…

A: The return that is earned on an investment annually is called average rate of return. This is the…

Q: A company purchases a component, which is critical in the production process, from an international…

A: NPV = PV of cashflows - PV of cashflowsPayback Period is the period within which the investment is…

Q: Assume that a company is considering purchasing a machine for $100,000 that will have a seven-year…

A: Year Cash inflow PV factor PV of Cash Inflow 1 21,000 0.8547 17,948.72 2…

Q: Lukow Products is investigating the purchase of a piece of automated equipment that will save…

A: Net present value is difference between present value of cash inflows and present value of cash…

Q: The Chief Operations Officer (COO) of a manufacturing firm recommends one of the manufacturing sites…

A: It represents the project's profitability reflected in absolute terms. Thus, it is estimated by…

Question

100%

The Mechanical Components Division manager asks you to recommend a make/buy decision on a major automotive subassembly that
is currently purchased externally for a total of $3.9 million this year. This cost is expected to continue rising at a rate of $300,000 per
year. Your manager asks that both direct and indirect costs be included when in-house manufacturing (make alternative) is evaluated.
New equipment will cost $3.2 million, have a salvage of $0.5 million and a life of 6 years. Estimates of materials, labor costs, and other
direct costs are $2.3 million, per year. Typical indirect rates, bases, and expected usage are shown. Perform the AW evaluation at
MARR = 12% per year over a 6-year study period.
Basis
Direct labor cost
Department
X
Y
Z
Rate
$2.35 per dollar
$0.50 per dollar
$20 per inspection
Materials cost
Number of
inspections
The annual worth for the make decision is $
The annual worth for the buy decision is $
The (Click to select) ✓ alternative is selected.
(Click to select)
buy
make
Expected Usage
$450,000
$855,000
4,500

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

Step 2

Step 3

Step 4

Step by step

Solved in 4 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine. The budgeted operating income of the West Division was $4,000,000 with total assets of $22, 000, 000 and noninterest - bearing current liabilities of $1,000,000. The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent. Ignoring taxes, how much is the residual income of the West division if the embroidery machine is purchased?
Consider a project to supply Detroit with 27,000 tons of machine screws annually for automobile production. You will need an initial $6,000,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,450,000 and that variable costs should be $275 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $825,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $392 per ton. The engineering department estimates you will need an initial net working capital investment of $580,000. You require a return of 11 percent and face a tax rate of 22 percent on this project. a-1. What is the estimated OCF for this project? (Do not round intermediate calculations. and round your answer to the nearest whole number,…
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. After careful study, Oakmont estimated the following costs and revenues for the new product: When the project concludes in four years the working capital will be released for investment elsewhere within the company. Required: Using Excel (this will save you time and effort) answer the following: Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV. Management is concerned that Sales Revenues and Expenses could be rising due to inflationary factors. So the projection for year 1 is as shown, but that sales revenues will grow by 2% per year for years 2-4; and that variable expenses will grow by 4% per year for years 2-4, and that fixed out-of-pocket operating…
vaibhav
A shelve manufacturer is developing a plan for the following two years. The question iswhether to lease a large workshop space with highproduction capacity or two workshop spaces with a smaller capacity. The initial cost to lease a large workshop space is equal tothe total cost of leasing two smaller ones. If the large workshop space is leased and customer demand is high, then NPV is $8,500,000 annually. If the large workshop is leased and customer demand is low, then NPV is$4,500,000. If two small workshops are leased and demand is low, the total NPV is $6,500,000 but if they experience high demand, the total NPV of two small offices will be $8,000,000.Some studies have been done on market dynamic and the market expert suggested that the likelihood of high demand is 0.7.Use the above information to determine which option returns the best NPV outcome in thetwo-year period.The rate of return is 0.1.
Assume that United Technologies is evaluating a proposal to change the company's manual design system to a computer-aided design (CAD) system. The proposed system is expected to save 10,000 design hours per year; an operating cost savings of $50 per hour. The annual cash expenditures of operating the CAD system are estimated to be $250,000. The CAD system requires an initial investment of $500,000. The estimated life of this system is five years with no salvage value. The tax rate is 40 percent. United Technologies has a cost of capital of 20 percent.Assume that management intends to use double-declining balance depreciation with a switch to straight-line depreciation (applied to any undepreciated balance) starting in Year 4.Determine the project's net present value
A manufacturer of automated optical inspection devices is deciding on a project to increase the productivity of the manufacturing processes. The estimated costs for the two feasible alternatives being compared are shown below. Use the internal rate of return (IRR) method to determine which alternative should be selected if the analysis period is 8 years and the company's MARR is 4% per year. Alternative M N Initial costs $30,000 $45,000 Net annual cash flow $4,500 $7,000 Life in years 8 8 (a) IRR of base alternative = (b) IRR of incremental cash flow = (c) Choose Alternative
Lukow Products is investigating the purchase of a piece of automated equipment that will save $130,000 each year in direct labor and inventory carrying costs. This equipment costs $780,000 and is expected to have a 6-year useful life with no salvage value. The company's required rate of return is 10% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher-quality output that will result in additional future cash inflows. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using table. Required: 1. What is the net present value of the piece of equipment before considering its intangible benefits? Note: Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount. 2. What minimum dollar value per year must be provided by the equipment's intangible benefits to justify the $780,000 investment? Note: Do not round…
Please show work
The plant manager of Orlando Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $275,000. The manager believes that the new investment will result in direct labor savings of $55,000 per year for 10 years. Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 a. What is the payback period on this project?fill in the blank 1 of 1 years b. What is the net present value, assuming a 10% rate of return? Use the table provided above. Round to the nearest whole dollar.Net present value fill in the blank 1 of 1$ c. What else should the manager consider in the analysis?
Can you kindly help show the steps for calculating the Working Capital for a product line capable of producing 1.25 Million units per year, total estimated investment cost for the new line is $25 Million, selling price is fixed for the project life at $125 per unit. Working capital based on a 2.5-month supply of raw materials and 1.5 months of combined inventory (WIP and finished goods)? Variable costs per unit include $35 for materials, $20 for manufacturing, and $18 for labor. There are additional fixed operating and maintenance costs totaling $14.25 Million per year. Salvage value equal to 20% of the purchase price at the end of the 6-year project life. The Federal tax rate is 23% and State tax rate is 8.75%. MARR of 18%. Inflation is expected to increase the variable and fixed costs by 6.4% after the first year. In years 3- 6, inflation is expected to decline by 1.2% each year (year 2 inflation is 6.4%, year 3 is 5.2%, etc.) The project falls under a 7-year MACRS class life. The…