Question

Benson 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 (14,900 Units × $21)	$	312,900
Labor (14,900 Units × $23)		342,700
Depreciation on manufacturing equipment*		40,000
Salary of supervisor of engine production		65,000
Rental cost of equipment used to make engines		21,000
Allocated portion of corporate-level facility-sustaining costs		78,000
Total cost to make 14,900 engines	$	859,600

^*The equipment has a book value of $100,000 but its market value is zero.

Required

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

2. Determine the maximum price per unit that Benson would be willing to pay for the engines, if production increased to 18,900 units?

Answer 1

Avoidable cost for lawn mowers
1)	Amount($)
Cost of material	3,12,900
Labour	3,42,700
Salary of supervisor	65,000
Rental cost of equipment	21,000
Total cost to make 14,900 engines	7,41,600
cost per unit = $741,600/14,900 units	49.77
Maximum price	$49.77
2)
	Amount($)
Cost of material (18,900 units x $21)	3,96,900
Labour (18,900 units x $ 23)	4,34,700
Salary of supervisor	65,000
Rental cost of equipment	21,000
Total cost to make 18,900 engines	9,17,600
cost per unit = $917,600/18900 units	48.55
Maximum price	$48.55