Your manufacturing company is currently producing just enough of its best-selling Awesome Gadget X to me this year’s demand. The fore cast for the next year is in, and its demand is expected to double (1 million new units per yr.) and stay at this level for the next 3 years. To handle the new 1 million units, your company can scrounge enough extra equipment and use current labor to handle most of the new parts and the final assembly. However, one part, Super Sick Feature Y (one needed in each unit), is at maximum production with your current equipment. Thus, you must either 1)acquire new equipment and new operators to make these critical parts yourself or 2) contract with a 3rd party company, Evil Sell out Corpation Z, to buy the parts at a fixed rate over 3 years and have them delivered to your facility for final assembly. If your company's interest rate is 10% determine how much it will cost per part to make them yourself, and the decide whether or not you should buy the parts from the 3rd party at $3.75/part. be sure to clearly show your work and you answers to the dilemma.
Given
Cost to buy parts from 3rd part-$3.75 per part
Initial capital investment for equipment- $6,000,000
Annual operation & maintenance for equipment- $1,000,000
Annual Labor Cost for new employees- $500,000
Raw material cost for additional parts- $0.30 per part
Salvage value at year 3 of new equipment- $1,000,000