The Bountiful Bread Company produces home bread-making machines. Currently, they pay a custom moulder £0.19 per piece (not including material costs) for the clear plastic face on the control panel. Demand for the bread-makers is forecast to be 200 000 machines per year, but there is some uncertainty surrounding this estimate. Bountiful is considering installing a plastic moulding system to produce the parts itself. The moulder costs £20 000 plus £7000 to install, and has an expected life of six years. Operating and maintenance costs are expected to be £30 000 in the first year and to rise at the rate of 5% per year.
Bountiful estimates its capital costs using a declining-balance depreciation model with a rate of 40%, and uses a MARR of 15% for such investments. Determine the total equivalent annual cost of the new moulder. Wha t is the cost per unit, assuming that production is 200 000 units per year?
Also, determine the breakeven production quantity. That is, what is the production quantity below which it is better to continue to purchase parts and above which it is better to purchase the moulder and make the parts in-house?