The Hyatt Company is trying to decide whether it should purchasenew equipment and continue to make its subassemblies internally orif production should be discontinued and the subassembly purchasedfrom an outside supplier. Either way production cannot continueusing the current equipment.

           

           New equipment for producing the subassemblies can be purchased at acost of $400,000. The equipment would have a five-year useful life(the company uses straight-line depreciation) and a $50,000 salvagevalue.

           

           Alternatively, the subassemblies could be purchased from an outsidesupplier. The supplier has offered to provide the subassemblies for$9 each under a five-year contract.

           

           Hyatt Company's present costs per unit of producing thesubassemblies internally (with the old equipment) are given below.The costs are based on a current activity level of 40,000subassemblies per year:

           

Direct Materials	$ 3.00
Direct Labour	$ 4.20
Variable Overhead	$ 0.60
Fixed Overhead ($0.80 supervision, $0.90 depreciation,
and $2 general companyoverhead)	$ 3.70
Total Cost per Unit	$11.50

           The new equipment would be more efficient and would reduce directlabour costs and variable overhead costs by 25%. Supervision costand direct materials cost per unit would not be affected by the newequipment. The company has no other use for the space now beingused to produce the subassemblies. The company's total generalcompany overhead would not be affected by this decision. Assumedirect labour is a variable cost.

          

           Required:

           Assume that 40,000 subassemblies are needed each year. Prepare ananalysis of the two alternatives and make a recommendation to themanagement of the company of the appropriate course of action.