Empex Corporation currently produces both videocassette cases (bodies) and metal-particle magnetic tape for commercial use. An increased demand for metal particle videotapes is projected, and Empex is deciding between increasing the internal production of both empty cassette cases and magnetic tape or purchasing empty cassette cases from an outside vendor. If Empex purchases the cases from a vendor, the company must also buy specialized equipment to load the magnetic tape into the empty cases, since its current loading machine is not compatible with the cassette cases produced by the vendor under consideration. The projected production rate of cassettes is 79,815 units per week for 48 weeks of operation per year. The planning horizon is seven years. After considering the effects of income taxes, the accounting department has itemized the costs associated with each option as follows:

• ??Make?? Option:

Annual Costs

Labor????????????.............????.....$1,445,633

Materials??????????.............????...$2,048,511

Incremental overhead........???? $1,088,110

Total annual cost??..........????..??$4,582,254

• ??Buy?? Option:

Capital Expenditure?

Acquisition of a new loading machine??...................??????.$405,000

Salvage value at end of seven years????......................??????.$45,000

Annual Operating Costs:

Labor??..????????????????????????????????.............??.....??.????.. $251,956

Purchase of empty cassette cases ($0.85/unit)??...????..$3,256.452

Incremental overhead????..????????????????????.............????. $822,719

Total annual operating costs??????????????????......??.....?? $4,331,127

The conventional assumption that cash flows occur in discrete lumps at the ends of years, as shown in Figure 6.5 .) Assuming that Empex??s MARR is 14%, calculate the unit cost under each option.

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$832,000 g= 4%, fixed cost $70,882 $60,590 g=6%, variable cost $68,679 O $54,400 2 3 A, for variable cost = (500)($272) = $54,400 A, for fixed cost = (200)($302.95) = $60,590 $1,282,035