Mark Industries Is Currently Purchasing Part No

question 103

Essay

Mark Industries is currently purchasing part no. 76 from an outside supplier for $80 per unit. Because of supplier reliability problems, the company is considering producing the part internally in an idle manufacturing plant. Annual volume over the next six years is expected to total 300,000 units at variable manufacturing costs of $75 per unit.
Mark must acquire $80,000 of new equipment if it reopens the plant. The equipment has a six-year service life, a $14,000 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance are expected to average $5,200 per year in years 4-6, 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% hurdle rate to determine whether Mark should make or buy part no. 76. Ignore income taxes.

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Definitions:

Finishing Department

The section in manufacturing where products undergo final processing, assembly, or completion.

Cost Allocated

The distribution of indirect costs to different cost objects, to fairly attribute overhead expenses to products or services.

Plantwide Rate

A single overhead absorption rate used throughout an entire manufacturing plant, applying the same rate to all products regardless of the department.

Activity-based Costing

A costing method that assigns overhead and indirect costs to specific activities related to production.