Exercise 611A Establishing price for an outsourcing decision

Exercise 6-11A Establishing price for an outsourcing decision LO 6-3 Vernon 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 (14,800 Units $27) Labor (14,800 Units x $22) Depreciation on manufacturing equipment* Salary of supervisor of engine production Rental cost of equipment used to make engines Allocated portion of corporate-level facility-sustaining costs Total cost 399,600 325,600 27,000 77,000 13,000 73,000 $915,200 to make 14,800 engines The equipment has a book value of $100,000 but its market value is zero Requirec a. Determine the maximum price per unit that Vernon would be willing to pay for the engines b. Determine the maximum price per unit that Vernon would be willing to pay for the engines, if production increased to 17,950 units? (For all requirements, round your intermediate calculations and final answers to 2 decimal places.) aximum price per unit Maximum price per unit a. M b.

Solution

1) Determine the maximum price per unit that Vernon would be will to pay for the engines?

Solution: $55.08

Working:

Cost of materials (14,800 Units × $20)

399,600

Labor (14,800 Units × $14)

325,600

Salary of supervisor of engine production

77,000

Rental cost of equipment used to make engines

13,000

Total Relevant Cost

815,200

No of Unit

14,800

Maximum price per unit

55.08

2) Determine the maximum price per unit that Vernon would be will to pay for the engines, if production increased to 17,950?

Solution: $54.01

Working:

Cost of materials (17,950 Units × $27)

484,650

Labor (17,950 Units × $22)

394,900

Salary of supervisor of engine production

77,000

Rental cost of equipment used to make engines

13,000

Total Relevant Cost

969,550

No of Unit

17,950

Maximum price per unit

54.01

Cost of materials (14,800 Units × $20)	399,600
Labor (14,800 Units × $14)	325,600
Salary of supervisor of engine production	77,000
Rental cost of equipment used to make engines	13,000
Total Relevant Cost	815,200
No of Unit	14,800
Maximum price per unit	55.08