Atwater Corporation manufactures winter sports equipment. The company has decide

Question

Atwater Corporation manufactures winter sports equipment. The company has decided to introduce a new line of snowmobiles, the XLR8, for next winter. These snowmobiles will be sold to retailers for $4,200 per vehicle. Because Atwater has some idle capacity, only $500,000 for additional fixed costs will be incurred annually. Atwater expects to manufacture and sell 10,000 XLR8 snowmobiles during the first year. Other estimated manufacturing costs per snowmobile are as follows:

Direct Materials $1,500

Direct Labor $1,750

Variable Overhead $250

The above costs include the costs of manufacturing the high performance engine for the XLR8.

Atwater is also considering buying these engines from Premier Motors for $600 per engine. If Atwater buys the engines from Premier, Atwater would reduce its direct labor cost by 10%, its direct materials cost by 25%, its variable overhead cost by 10%, and the $500,000 of fixed costs by 70%.

(C) Revised estimates show a first year sales volume of 20,000 XLR8 snowmobiles. At this new volume, additional equipment, at an annual rental cost of $200,000 must be acquired to manufacture enough high performance engines. This additional equipment gives Atwater the capacity to produce up to 35,000 engines each year. [Note: This equipment is used exclusively to manufacture the engines and no other component of the snowmobile.] Atwater expects sales on the XLR8 to level off at 30,000 snowmobiles during the second year. Under the revised circumstances, should Atwater make or buy the engines? Show calculations supporting your answer.

Explanation / Answer

The income is more in case of not buying the engine.

Also, the cost saving is as follows if the company buys the engine @ 600

Savings is 575 and also additional rent of $200,000

Total Reduced cost scenario Total Price per vehicle                     4,200 Expected sales unit                  20,000                                      20,000 Total sales          84,000,000 84,000,000 Fixed cost                500,000                500,000                                    150,000         150,000 Direct material per unit                     1,500          30,000,000                                         1,125 22,500,000 Direct Labor per unit                     1,750          35,000,000                                         1,575 31,500,000 variable overhead per unit                        250            5,000,000                                            225     4,500,000 Rent                                    200,000         200,000 Engine                                            600 12,000,000 Income          13,500,000 13,150,000

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