Elon Motors produces electric automobiles. In recent years, they have been making all components of the cars, excluding the batteries for each vehicle. The company's leadership team has been considering the ways to reduce the cost of producing its cars. The leadership team considered various options and believes Elon Motors could reduce the cost of each car if it produces the car batteries instead of purchasing$$ from the current vendor, Averi Battery Company.

Currently, the cost of each battery is $$325$ per unit. Elon Motors feels that it could greatly reduce the cost if the production team makes each battery. To produce these batteries, the company will need to purchase specialized equipment. Cost of the new equipment is$$ $$1,570,000$ with salvage value of $$70,000$ and a useful life of $10$ years.

Currently, Elon Motors purchases $3,000$ batteries per year, and$$ expects that the production will remain the same for the coming $10-$year period. To make$$ batteries, Elon Motors has provided$$ below the relevant data about the proposed project.

$*$ Purchase of direct materials at a cost of $$125$ per battery produced.

$*$ Employing$$ three production workers to make the batteries. Each worker likely works for $2,080$ hours per year and makes $$25$ per hour. In addition, health benefits will amount to $20\%$ of the workers' annual wages.

$*$ The variable manufacturing overhead costs are estimated to be $$25$ per unit.

$*$ Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.

$*$ Cost of capital $($hurdle rate$)$ has been determined to be $10\%$ for all new projects, and the current tax rate of $30\%$ is anticipated to remain unchanged.

$*$ The pricing for the company's products as well as number of units sold will not be affected by this decision.

$*$ Elon Motors uses straight$-$line method to depreciate the equipment.

Data:

Cost of new equipment

Expected life of equipment in years

Salvage Value

Life Production

Annual production or purchase needs

Number of workers needed

Annual hours to be worked per employee

Earnings per hour for employees

Health Benefits $-\%$ of Wages

Cost of Direct Materials

Variable Manufacturing Overhead Costs

Unit Cost to Purchase Batteries

Required rate of return

Tax rate

Make Purchase

Cost to Produce

Annual cost of direct material:

Need $-$ Cost direct material for of $2,500$ Batteries

Annual cost of direct labor for new employees:

Wages

Health benefits

Total wages and benefits

Other variable production costs

Total annual production costs

Annual cost to purchase cans

Annual Cost to Purchase Batteries

Part $1$ Cash Flows Over the Life of the Project

Before Tax Tax After Tax

Item Amount Effect Amount

Annual cash savings

Tax savings due to depreciation

Total after$-$tax annual cash flow

Answer rating: 100% (QA)

Answer To analyze the proposed project of producing batteries inhouse we need to calculate the annua... View the full answer