Question

A company produces lawnmowers. An outside supplier has offered to make the 10,310 lawnmower motors needed each year. The following per-unit costs pertain to one lawnmower motor:

Direct materials: $11

Direct labor: $23

Factory Rent: $19

Variable manufacturing overhead: $5

Depreciation of Special Equipment: $4

Allocated General Overhead: $5

The company would continue to rent the factory, even if the supplier's offer were accepted and lawnmower motor production were outsourced. If lawnmower motor production were outsourced, the special equipment would be discarded and the allocated general overhead would be reduced by 20%. What is the maximum price per motor that this company should be willing to pay to purchase the motors from the outside supplier? (Round to the nearest dollar and cents.)

Answer 1

Calculation of cost to manufacture 10,310 lawnmower motor:

Particulars	Per Unit Cost	Total Cost
Direct Materials	$11	11*10310 = $ 113,410.00
Direct Labour	$23	23*10310 = $ 237,130.00
Factory Rent	$19	19*10310 = $ 195,890.00
Variable Manufacturing Overhead	$5	05*10310 = $ 51,550.00
Depreciation of Special Equipment	$4	04*10310 = $ 41,240.00
Allocated General Overhead	$5	05*10310 = $ 51,550.00
Total Cost		$ 690,770

Unavoidable costs if lawnmower motors are outsourced:

Particulars	Total Amount
Rent	$ 195,890.00
Reduced Allocated General Overhead (by 20%)	$ 041,240.00
Total	$ 237,130.00

As the above unavoidable costs are irrelevant to the decision whether the motor should be outsourced or not it should not be taken into consideration to decide the price of the motor.

Additional Cost incurred for production is = $690,770.00-$237,130.00 = $ 453,640.00

Additional Cost Per Unit = $453,640/10310 = $ 44.00 per unit

So the maximum price the company is willing to pay is $44.00 per unit.