When Option B is compared with Option C,

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter12: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 10P: Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6...
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DJDC Machinery has been making a part for its industrial rotary gear shaving machine. The engineers are asked to investigate alternative ways of obtaining the part, as the unit cost for the part currently is not competitive in the marketplace. DJDC needs 25,000 parts per year for the next three years. At that point, any capital equipment could be sold. DJDC tax rate is 40%, and its interest rate is 12%.
• Option A: Continue to produce the part with the old machine. The machine has been fully depreciated. The current machine could be sold for $6,000 in three years. Making the part with the old machine involves the following: Variable costs for the part are $4 for direct materials, $3 for direct labor, and $2 for variable manufacturing overhead.
• Option B: Purchase the part from outside for $13 per part, including shipping.
• Option C: Replace the old machine with the new model. The newer model would cost $55,000 and would depreciate. The new machine, if purchased, could be sold for $15,000 in three years. It would cut direct labor costs to $1.50 per unit and variable costs to $0.75 per part. If the new model is acquired, the old machine would be sold for $25,000.

When Option B is compared with Option C, determine the break-even outsourcing cost per unit.

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