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:

Prospect's Needs

The specific requirements or desires of potential customers that a company aims to fulfill with its products or services.

Care About Customers

The practice of valuing and prioritizing the needs, satisfaction, and experiences of clients or patrons.

Customer Services

A range of services provided to assist customers in making cost effective and correct use of a product.

Warranties

Warranties are promises made by a seller to a buyer to repair or replace a product within a certain time frame if it fails to meet specified criteria.