Harrison Company makes and sells lawn mowers for which it currently makes the en
ID: 2554631 • Letter: H
Question
Harrison 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.
*The equipment has a book value of $94,000 but its market value is zero.
Required
a. Determine the maximum price per unit that Harrison would be willing to pay for the engines.
b. Determine the maximum price per unit that Harrison would be willing to pay for the engines, if production increased to 18,350 units?
Cost of materials (13,900 Units × $14) $ 194,600 Labor (13,900 Units × $19) 264,100 Depreciation on manufacturing equipment* 28,000 Salary of supervisor of engine production 66,000 Rental cost of equipment used to make engines 28,000 Allocated portion of corporate-level facility-sustaining costs 87,000 Total cost to make 13,900 engines $ 667,700Explanation / Answer
Depreciation on equipment and allocated cost is a irrelevant cost as it will be incurred whether the engines is purchased or manufactured .Salary of supervisor will be avoidable if purchased from outside or Rental cost of equipment will be saved as there will be no production.
A)Total Saving If purchased: 194600 material +264100labor +66000+28000 = 552700
maximum price per unit = 552700 / 13900 = $ 39.76 PER unit
B)maximum price per unit : 552700 / 18350 = $ 30.12 per unit
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