10.00 points Problem 9-15 Determining Whether to Accept a Special Order and Whet

Question

10.00 points Problem 9-15 Determining Whether to Accept a Special Order and Whether to Make or Buy (LO1 - CC4, 5) The Engine Guys produces specialized engines for "snow climber buses. The company's normal monthly production volume is 9,500 engines, whereas its monthly production capacity is 19,000 engines. The current selling price per engine is $1,350. The cost per unit of manufacturing and marketing the engines at the normal volume is as follows: Costs per Unit for Engines Direct materials Direct labour Variable overhead Fixed overhead $ 110 216 216 577 35 Subtotal Marketing costs: Fixed Subtotal Total unit cost 149 217 794 Required Answer the following independent questions 1-a. The Provincial Bus Company wishes to purchase 750 engines in October. The bus company is willing to pay a flxed fee of $1,140,000 and reimburse The Engine Guys for all manufacturing costs incurred to manufacture 750 motors. October is a busy month for The Engine Guys, and there are sufficient orders to operate at 100% capacity utilization. There will be no variable marketing costs on this govenment contract. Compute the incremental benefit of the contract l benefit of the

Explanation / Answer

1-a) Fixed fee for 750 engines $       11,40,000 Contribution lost on the 750 engines by not selling in the normal market, as the company can operate at 100% capacity in October: Selling price per unit $                                1,350 Variable expenses per unit =110+216+35+68 = $                                    429 Contribution margin per unit = $                                    921 Total contribution margin lost = 750*921 = $         6,90,750 Incremental benefit of the contract $         4,49,250 1-b) Yes. The Provincial Company's contract should be accepted. 2-a) Buy 4750 units and make 4750 units Make 9500 units Purchase cost (4750*648) 3078000 0 Variable manufacturing (110+216+35=$361 per unit) 1714750 3429500 Fixed manufacturing (9500*216) 1641600 2052000 (9500*216*0.80) (9500*216) Variable marketing 516800 646000 (4750*68+4750*68*0.6) (9500*68) Fixed marketing (9500*149) 1415500 1415500 Cost of option 8366650 7543000 Difference in favor of make option 823650 2-b) No The contractor's offer should not be accepted as it is costlier.

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