Question

Problem 5

Currently Schultz makes a lawnmower and also makes the engine that is used for this model. The current demand is 10,000 units but Schultz can only make 9,000 because it takes 4 hours on a special machine to make the mower and they have only 36,000 hours available. It takes 1 hour of the total to make the engine and 3 hours to make the rest of the mower. An employee has suggested we consider buying the engine instead of making it as this would free 9,000 x 1 = 9,000 hours and that would allow us to make 9,000 / 3 = 3,000 more mowers. Considering the information below, determine our current income and the income if we bought the engine. We will buy all or none of the engines needed.

Cost of Lawnmower

Direct Materials = $600 ($90 for engine)

Direct Labor = $300 ($100 for engine)

Variable OH = $275 ($75 for engine)

Selling Price = $1,500

Fixed Costs = $2,800,000

Cost to buy engine = $300

Answer 1

	Current Income		Buy Engine
	Per unit	Total	Per unit	Total
Available hours		36,000		36,000
Hours Per unit		4		3
Production units		9,000		12,000
Sale @ $1500 units	$             1,500.00	$ 13,500,000.00	$          1,500.00	$ 18,000,000.00
Variable Cost:
Material @ $600 per unit	$                600.00	$    5,400,000.00	$             510.00	$   6,120,000.00
Direct Labour @ $300 per unit	$                300.00	$    2,700,000.00	$             200.00	$   2,400,000.00
Variable Overhead @ $275 per unit	$                275.00	$    2,475,000.00	$             200.00	$   2,400,000.00
Buying Price of Engine			$             300.00	$   3,600,000.00
Total Variable Cost	$             1,175.00	$ 10,575,000.00	$          1,210.00	$ 14,520,000.00
Contribution	$                325.00	$    2,925,000.00	$             290.00	$   3,480,000.00
Fixed Cost	$                311.11	$    2,800,000.00	$             233.33	$   2,800,000.00
Net Income	$                   13.89	$        125,000.00	$                56.67	$       680,000.00