Wornell Industries Is Currently Purchasing Part No

question 12

Essay

Wornell 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.
Wornell must acquire $200,000 of new equipment if it reopens the plant. The equipment has a five-year service life, a $20,000 salvage value, and will be depreciated by the straight-line method. Normal equipment maintenance is expected to total $12,000 in year 4, and the equipment will be sold at the end of its life for $20,000, which represents $20,000 gain.
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 Wornell should make or buy part no. 456. The company is subject to a 30% income tax rate.
Wornell is better off to make part no. 456.

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Definitions:

Distributive Negotiation

A negotiation approach focusing on dividing a fixed amount of resources, often leading to a win-lose scenario.

Integrative Negotiation

A negotiation strategy focused on collaboration between parties to find solutions that satisfy the interests of both, often resulting in a win-win outcome.

Binding Decision

A final and authoritative decision or ruling that is mandatory and must be followed or complied with.

Neutral Third Party

An unbiased, impartial entity or individual that is not involved in the conflict and can facilitate negotiation or resolution.