Breezier University MBA Program Managerial Accounting BUSS 631 spring 2013 case 3 The ROR Company's old equipment for making subassembly is worn out. The company is considering two courses of action: (a) Completely replacing the old equipment with new equipment or (b) Buying subassembly from a reliable outside supplier, who has quoted a unit price of $1 on a 7-year contract for a minimum of 50,000 units per year. Production was 60,000 units in each of the past 2 years. Future needs for the next 7 years are not expected to fluctuate beyond 50,000 to 70,000 units per year.
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The president asks you to compare the alternatives on a total-annual-cost basis and on a per-unit basis for annual needs of 60,000 units. Which alternative seems more attractive? 2. Would your answer to number 1 change if the needs were 50,000 units? 70,000 units? At what volume level would ROR be indifferent between making and buying subassembly? Show your computations. 3. What factors, other than the preceding ones, should the accountant bring to the attention of management to assist them in making their decision? Include the considerations that might be applied to the outside supplier.
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