Solution 191 The quantitative factors to be considered in a make-or-buy decision include the incremental costs to make the product, the incremental costs of buying the product, and the opportunity cost (potential benefit foregone) if the product is made. Generally, all variable production costs are relevant in a make-or-buy decision, but only some fixed costs, or no fixed costs, are relevant because many fixed costs will be incurred regardless of whether the decision is to make or buy. Qualitative factors include the possible adverse effect on employees and the stability of the supplier's price and quality. S-A E 192 You are the general accountant for Word Systems, Inc., a typing service based in Los Angeles, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities. Two options have emerged. Option D is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Option Z would be for the company to invest in an entirely different computer system. The software for this system is impressive, and it comes with individual laser printers. However, the manufacturer is not well known, and the software does not connect well with well-known software. The net present value information for these options follows: Option Z Option D Initial investment $95,000 $270,000 Cost savings of labor over 4 years 89,000 284,000 Required: Prepare a brief report for management in which you make a recommendation for one system or the other, using the information given. Solution 192 The company should accept Option D, to purchase upgrades to its present system and to buy a more efficient printer. First, the changes will be easier to implement because the equipment is similar to that which is already in use. Second, the cost savings exceed those of Option Z.
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