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Should this Firm Build a Factory?

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Question: Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should:

1. Build because the rate of return on the factory is 35 percent.
2. Not build because the rate of return on the factory is only 6 percent.
3. Build because the rate of return on the factory is 30 percent.
4. Not build because the rate of return on the factory is only 12 percent.

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Solution Summary

I explain the decision of a firm to build a new factory given several factors, including expected profit, interest rates, and initial cost.

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Should Dana buy or make the parts?

Given the following data, please answer the following:

Total Cost for 50,000 Units Cost per Unit

Direct materials $ 400,000 $ 8
Direct labor 250,000 5
Variable factory overhead 150,000 3
Fixed factory overhead 300,000 6
Total manufacturing costs $1,100,000 $22

1.Assume that the capacity now used to make parts will become idle if the parts are purchased. Should Dana buy or make the parts? Show computations.

2.Assume that the capacity now used to make parts will either (a) be rented to a nearby manufacturer for $75,000 for the year or (b) be used to make oil filters that will yield a profit contribution of $100,000. Should Dana buy or make part EC113? Show your computations.

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