Danford Company, a manufacturer of farm equipment, currently produces 20,000 units of gas filters per year for use in its lawn-mower production. The costs, based on the previous year's production, are reported below. It is anticipated that gas-filter production will last five years. If the company continues to produce the product in-house, annual direct material costs will increase $3000/year (For example, annual material costs during the first production year will be $63,000.) Direct labor will also increase by $5000/year. However, variable overhead costs will increase at the rate of $2000/year and the fixed overhead will remain at its current level over the next five years. John Holland Company has offered to sell Danford 20,000 units of gas filters for $25 per unit. If Danford accepts the offer, some of the manufacturing facilities currently used to manufacture the filter could be rented to a third party for $35,000 per year. The firm's interest rate is known to be 15%. What is the unit cost of buying the gas filter from the outside source? Determine whether Danford should off load or manufacture? Item Direct materials Direct labor Variable overhead (power and water) Fixed overhead (light and heat) Total cost Expense ($) $ 60,000 $180,000 $135,000 $70,000 $445,000
Danford Company, a manufacturer of farm equipment, currently produces 20,000 units of gas filters per year for use in its lawn-mower production. The costs, based on the previous year's production, are reported below. It is anticipated that gas-filter production will last five years. If the company continues to produce the product in-house, annual direct material costs will increase $3000/year (For example, annual material costs during the first production year will be $63,000.) Direct labor will also increase by $5000/year. However, variable overhead costs will increase at the rate of $2000/year and the fixed overhead will remain at its current level over the next five years. John Holland Company has offered to sell Danford 20,000 units of gas filters for $25 per unit. If Danford accepts the offer, some of the manufacturing facilities currently used to manufacture the filter could be rented to a third party for $35,000 per year. The firm's interest rate is known to be 15%. What is the unit cost of buying the gas filter from the outside source? Determine whether Danford should off load or manufacture? Item Direct materials Direct labor Variable overhead (power and water) Fixed overhead (light and heat) Total cost Expense ($) $ 60,000 $180,000 $135,000 $70,000 $445,000
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
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Transcribed Image Text:Danford Company, a manufacturer of farm equipment, currently produces 20,000 units of gas filters per
year for use in its lawn-mower production. The costs, based on the previous year's production, are
reported below. It is anticipated that gas-filter production will last five years. If the company continues to
produce the product in-house, annual direct material costs will increase $3000/year (For example,
annual material costs during the first production year will be $63,000.) Direct labor will also increase by
$5000/year. However, variable overhead costs will increase at the rate of $2000/year and the fixed
overhead will remain at its current level over the next five years. John Holland Company has offered to
sell Danford 20,000 units of gas filters for $25 per unit. If Danford accepts the offer, some of the
manufacturing facilities currently used to manufacture the filter could be rented to a third party for
$35,000 per year. The firm's interest rate is known to be 15%. What is the unit cost of buying the gas
filter from the outside source? Determine whether Danford should off load or manufacture?
Item
Direct materials
Direct labor
Variable overhead
(power and water)
Fixed overhead
(light and heat)
Total cost
Expense ($)
$ 60,000
$180,000
$135,000
$70,000
$445,000
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