Question

X Company currently buys 8,000 units of a part each year from a supplier for $8.00 per part, but it is considering making the part instead. In order to make the part, X Company will have to buy equipment that will cost $150,000. The equipment will last for 6 years, at which time it will have zero disposal value. X Company estimates that it will cost $31,550 a year to make all 8,000 units.

What is the approximate rate of return if X Company makes the part instead of buying it from the supplier?

Answer 1

Cost per year:

To buy = 8,000 X $8 = $64,000

To make = ($150,000 / 6) + $31,550 = $56,550

Gain from making = $64,000 - $56,550 = $7,450

Rate of return = $7,450 / $150,000

= 5% (or) 4.97%