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Category > Accounting Posted 22 May 2017 My Price 6.00

Question Sure Fire Company

Question
Sure Fire Company manufacture a variety of products in four plants located in Sydney. The company
is currently purchasing an electronic igniter from an outsider supplier for $62 per unit. Because of a
supplier reliability problems, the company is considering producing the igniter internally in a
manufacturing plant that is currently unused. Annual volume over the next five years is expected to
total 400 000 units at variable manufacturing costs of $60 per unit. Management must hire a factory
supervisor and assistant for a total annual salary and fringe benefit package of $95 000. In addition,
the company must acquire $60 000 of new equipment. The equipment has a five service life and a
$12 000 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance
are expected to average $4 500 per year in years 3-5, and the equipment will be sold at the end of its
life. (Ignore income taxes).
Required:
1. Should discounted cash flow be used in this outsourcing decision? Why?
2. Ignoring your answer to requirement 1, use the net present value method (total cost
approach) and a 14 per cent hurdle rate to determine whether management should
manufacture or outsourcing the igniters.
3. Suppose management is able to negotiate a lower purchase price from its supplier. At what
purchase price would management be financially indifferent between manufacturing and
outsourcing the igniters?

Answers

SuperTutor
(15)
Status NEW Posted 22 May 2017 08:05 AM My Price 6.00

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