Racer Industries is currently purchasing Part No. 76 from an outside supplier for $80 per unit. Because of supplier reliability problems, the company is considering producing the part internally in an idle manufacturing plant. Annual volume over the next six years is expected to total 300,000 units at variable manufacturing costs of $75 per unit.Racer must acquire $80,000 of new equipment if it reopens the plant. The equipment has a six-year service life, a $14,000 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance are expected to average $5,200 per year in years 4-6, and the equipment will be sold at the end of its life.YearFV of $1 at 12%FV of an ordinary annuity at 12% PV of $1 at 12%PV of an ordinary annuity at
12% 11.1201.0000.8930.89321.2542.1200.7971.69031.4053.3740.7122.40241.5744.7790.6363.03751.7626.3530.5673.60561.9748.1150.5074.111Required:Rounding to the nearest dollar, use the net-present-value method (total-cost approach) and a 12% hurdle rate to determine whether Mark should make or buy Part No. 76. Ignore income taxes.
What will be an ideal response?
| Racer is better off to make Part No. 76. | ? | |
| Buy: Purchase (300,000 units × $80) | $(24,000,000) × 4.111 | $ 98,664,000 |
| Make: Variable manufacturing costs (300,000 units × $75) | $(22,500,000) × 4.111 | $(92,497,500) |
| New Equipment | $(80,000) × 1.0 | (80,000) |
| Repairs and maintenance | $(5,200) × (4.111 - 2.402) | (8,887) |
| Equipment sale | $14,000 × 0.507 | 7,098 |
| Total | ? | $(92,579,289) |
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