Community Challenges, a nonprofit organization for physically and mentally challenged people, manufactures a variety of products in four plants located in California. The company is currently purchasing an electronic igniter from an outside supplier for $62 per unit. Because of supplier reliability problems, the company is considering producing the igniters 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 $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-year 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.

1. Should discounted cash flows 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 percent hurdle rate to determine whether management should manufacture or outsource 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?

  • CreatedApril 22, 2014
  • Files Included
Post your question