Posted: July 14th, 2016

What is your recommendation for this decision?

Problem #3
Mason Company currently produces a component that it uses in making some of its products. Mason has
Calculated the following costs for making the part:

Unit-level costs
Materials $20
Labor 28
Overhead 2
Allocated facility-level costs 10
Total cost $60

Mason is considering outsourcing the component. A supplier has offered to sell the component to Mason for $54 each. Hart needs 10,000 units each year.

Required: Should Mason outsource the component? Support your answer with appropriate computations.

Problem #4
Rodriguez Company is considering purchasing new equipment. The manager has gathered the following
information:

Current Machinery
Original cost $25,000
Accumulated depreciation 20,000
Annual operating costs 5,500
Current market value 750
Salvage value at the end of five years 0

New Machinery:
Cost $28,000
Annual operating costs 500
Salvage value at end of five years 0

Required:
1) Identify the sunk costs associated with this decision.
2) Compute the increase or decrease in total income over the five-year period if the company chooses to buy the new equipment.
3) What is your recommendation for this decision?