Chec Exercise 6-11A Establishing price for an outsourcing decision LO 6-3 Adams
ID: 2514280 • Letter: C
Question
Chec Exercise 6-11A Establishing price for an outsourcing decision LO 6-3 Adams 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. t of materials (13,700 Units$23) Depreciation on manufacturing equipment Salary of su Rental cost of equipment used to make engines Allocated portion of corporate-level facility-sustaining costs Total cost to make 13,700 enginer $315,10o 205,500 32,000 79,000 10,000 71,000 712,600 r of engine production The equipment has a book value of $95,000 but its market value is zero. Required a. Determine the maximum price per unit that Adams would be wiling to pay for the engines b. Determine the maximum price per unit that Adams would be willing to pay for the engines, if production increased to 18,700 units? For all requirements, round your intermediate calculations and final answers to 2 decimal places.) K Prev 8 of 10 NextExplanation / Answer
Note : The maximum price per unit that Adams company will be willing to pay shall be the total cost of manufacturing that can be avoided if company opts to purchase the engnines instead of manufacturing them. Accordingly depreciation & allocated costs are not revelevant cost to determine the maximum price as they are unavoidable cost (ie those costs the company have to bear even if it opts to purchase the engnines).
Answer a
Computation of Avoidable cost per unit when production is at 13,700 units
Maximum price per unit = $44.50
Answer b
Computation of Avoidable cost per unit when production is at 18,700 units
Maximum price per unit = $42.76
Particulars Amount ($) Cost of material (13,700 * $23) 315,100 Labour (13,700 * $15) 205,500 Supervisor's salary 79,000 Rental cost of equipment 10,000 Total cost for 13,700 units 609,600 Cost per unit ($609,600 / 13,700) $44.50