The Mechanical Components Division manager asks you to recommend a make/buy decision on a major automotive subassembly that is currently purchased externally for a total of $3.9 million this year. This cost is expected to continue rising at a rate of $300,000 per year. Your manager asks that both direct and indirect costs be included when in-house manufacturing (make alternative) is evaluated. New equipment will cost $3 million, have a salvage of $0.5 million and a life of 6 years. Estimates of materials, labor costs, and other direct costs are $1.5 million, per year. Typical indirect rates, bases, and expected usage are shown. Perform the AW evaluation at MARR = 12% per year over a 6-year study period. Show both hand and spreadsheet solutions.
 FIGURE 1.png)
Determine AW for Make and Buy alternatives. Make has annual indirect costs.
Hand solution: Make: Indirect cost computation
 ANSWER.png)
AWmake = -3,000,000(A/P,12%,6) + 500,000(A/F,12%,6) – 1,500,000 – 1,595,000
= -3,000,000(0.24323) + 500,000(0.12323) -3,095,000
= $-3,763,075
AWbuy = -3,900,000 – 300,000(A/G,12%,6)
= -3,900,000 – 300,000(2.1720)
= $-4,551,600
Select make alternative
Spreadsheet solution: Select make alternative.
 FIGURE 4.png)
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