You are the primary engineer overseeing your company's best-selling product line. Even though the product sells very well, you want to add 1 million units per year in sales and keep that level over the next 3 years. To make all of these new units yourselves, you will need to invest in new manufacturing equipment and labor/maintenance costs to operate this equipment over the 3-year period. You must purchase the raw materials for the product, which average $0.30 per unit, and you will be able to salvage the equipment after 3 years. The details of these costs are given in the table below, along with a formula you may need. However, you may also contract with a third party to manufacture these products off-site. If you do, they will charge you $3.75 / unit, and they will pay for the raw materials, equipment, labor, O&M (they will not share the salvage value with you). If your MARR= 6%, a) use Annual Equivalent Worth Analysis to determine the unit cost per product to man facture them yourself, and b) decide whether to buy the parts for $3.75 each or make them yourself. CR(i)= (1 -S)(A/P, i, N) + is Cost to Buy Parts from 3rd Party Initial Capital Investment for Equipment Annual Operation & Maintenance for Equipment Annual Labor Cost for New Employees Raw Material Cost for Additional Parts Salvage Value at Year 3 of New Equipment $3.75/part $6,000,000 $1,000,000 $500,000 $0.30 / part $1,000,000
You are the primary engineer overseeing your company's best-selling product line. Even though the product sells very well, you want to add 1 million units per year in sales and keep that level over the next 3 years. To make all of these new units yourselves, you will need to invest in new manufacturing equipment and labor/maintenance costs to operate this equipment over the 3-year period. You must purchase the raw materials for the product, which average $0.30 per unit, and you will be able to salvage the equipment after 3 years. The details of these costs are given in the table below, along with a formula you may need. However, you may also contract with a third party to manufacture these products off-site. If you do, they will charge you $3.75 / unit, and they will pay for the raw materials, equipment, labor, O&M (they will not share the salvage value with you). If your MARR= 6%, a) use Annual Equivalent Worth Analysis to determine the unit cost per product to man facture them yourself, and b) decide whether to buy the parts for $3.75 each or make them yourself. CR(i)= (1 -S)(A/P, i, N) + is Cost to Buy Parts from 3rd Party Initial Capital Investment for Equipment Annual Operation & Maintenance for Equipment Annual Labor Cost for New Employees Raw Material Cost for Additional Parts Salvage Value at Year 3 of New Equipment $3.75/part $6,000,000 $1,000,000 $500,000 $0.30 / part $1,000,000
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:You are the primary engineer overseeing your company's best-selling product line.
Even though the product sells very well, you want to add 1 million units per year in sales and
keep that level over the next 3 years. To make all of these new units yourselves, you will
need to invest in new manufacturing equipment and labor/maintenance costs to operate this
equipment over the 3-year period. You must purchase the raw materials for the product,
which average $0.30 per unit, and you will be able to salvage the equipment after 3 years.
The details of these costs are given in the table below, along with a formula you may need.
However, you may also contract with a third party to manufacture these products off-site. If
you do, they will charge you $3.75 / unit, and they will pay for the raw materials, equipment,
labor, O&M (they will not share the salvage value with you).
If your MARR= 6%, a) use Annual Equivalent Worth Analysis to determine the unit
cost per product to manufacture them yourself, and b) decide whether to buy the parts
for $3.75 each or make them yourself.
CR(i) = (1 -S)(A/P,i, N) + iS
Cost to Buy Parts from 3rd Party
Initial Capital Investment for Equipment
Annual Operation & Maintenance for Equipment
Annual Labor Cost for New Employees
Raw Material Cost for Additional Parts
Salvage Value at Year 3 of New Equipment
$3.75/part
$6,000,000
$1,000,000
$500,000
$0.30 / part
$1,000,000
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