Question

Finch Company makes and sells lawn mowers for which it currently makes the engines. It has an opportunity to purchase the engines from a reliable manufacturer. The annual costs of making the engines are shown here.

Cost of materials (14,600 Units × $28)	$	408,800
Labor (14,600 Units × $27)		394,200
Depreciation on manufacturing equipment*		30,000
Salary of supervisor of engine production		69,000
Rental cost of equipment used to make engines		10,000
Allocated portion of corporate-level facility-sustaining costs		89,000
Total cost to make 14,600 engines	$	1,001,000

^*The equipment has a book value of $94,000 but its market value is zero.

Required

1. Determine the maximum price per unit that Finch would be willing to pay for the engines.

2. Determine the maximum price per unit that Finch would be willing to pay for the engines, if production increased to 18,350 units.

(For all requirements, Round your answers to 2 decimal places.)

Answer 1

Answer:

Depreciation on equipment and allocated cost is a irrelevant cost as it will be incurred whether the engines is purchased or manufactured .Salary of supervisor will be avoidable if purchased from outside or Rental cost of equipment will be saved as there will be no production.

	14,600units	18,350units
Cost of Material @28 per unit	408,800	513,800
Labor @27 per unit	394,200	495,450
Supervisor salary	69,000	69,000
Rental cost of Equipment	10,000	10,000
Total cost	882,000	1,088,250
Maximum Price per unit Total cost/Number of units	$60.41	$59.31

Note:

Supervisor salary, Rent of equipment are fixed cost constant at any level of production