Structural Steel Systems manufactures steel buildings for agricultural and home applications. Currently, managers are trying to decide between two alternatives regarding a major overhead door assembly for the company's buildings. The alternatives are as follows:
• Purchase new equipment with a five-year life and no salvage value at a cost of $10,000,000. The company uses straight-line depreciation and allocates that amount on a per-unit-of-production basis.
• Purchase the assemblies from an outside vendor who will sell them for $480 each under a five-year contract.
Following is Structural Steel Systems' present cost to produce one door assembly based on current and normal activity of 50,000 units per year.
Direct material ....... $278
Direct labor ......... 132
Variable overhead ..... 86
Fixed overhead* ....... 72
Total .......... $568
*The fixed overhead includes $14 supervision cost, $18 depreciation, and $40 general company overhead.
The new equipment would be more efficient than the old equipment and would reduce direct labor costs and variable overhead costs by 25 percent. Supervisory costs of $700,000 would be unaffected. The new equipment would have a capacity of 75,000 assemblies per year. Structural Steel Systems could lease the space occupied by current assembly production to another firm for $228,000 per year if the company decides to buy from the outside vendor.
a. Show an analysis, including relevant unit and total costs, for each alternative of producing or buying the assemblies. Assume 50,000 assemblies are needed each year.
b. How would your answer differ if 60,000 assemblies were needed?
c. How would your answer differ if 75,000 assemblies were needed?
d. In addition to quantitative factors, what qualitative factors should be considered?