Worrell Industries Is Currently Purchasing Part No

question 54

Essay

Worrell Industries is currently purchasing Part No. 456 from an outside supplier for $90 per unit. Because of supplier reliability problems, the company is considering producing the part internally in a currently idle manufacturing plant. Annual volume over the next five years is expected to total 400,000 units at variable manufacturing costs of $88 per unit.
Worrell must acquire $200,000 of new equipment if it reopens the plant. The equipment has a five-year service life and a $20,000 salvage value, and will be depreciated by the straight-line method. (Note: Worrell ignores salvage values in depreciation calculations.) Normal equipment maintenance is expected to total $12,000 in year 4, and the equipment will be sold at the end of its life.
Required:
Rounding to the nearest dollar, use the net-present-value method (total-cost approach) and a 12% after-tax hurdle rate to determine whether Worrell should make or buy Part No. 456. The company is subject to a 30% income tax rate.

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Definitions:

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The capability to acquire knowledge through experiences, resolve issues, and apply understanding to adjust to changing circumstances.

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