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 $22 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 600,000 units at variable manufacturing costs of $20 per unit. Management must hire a factory supervisor and assistant for a total annual salary and fringe benefit package of $30,000.
In addition, the company must acquire $150,000 of new equipment. The equipment has a five-year service life and a $30,000 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance are expected to average $15,000 per year in years 3-5, and the equipment will be sold at the end of its life.
Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)
Required:
2-a.Use the net-present-value method (total-cost approach) and a 14 percent hurdle rate to calculate the net present value of the decision to outsource and the net present value of the decision to manufacture. (Round your final answers to the nearest dollar. Negative amounts should be indicated by minus sign.)
Net present value (Outsource)
Net present value (Manufacture)
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? (Round your answer to 2 decimal places.)
Purchase price per unit