Question

Franklin 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. Cost of materials (14,900 Units X $28) Labor (14,900 Units X $26) Depreciation on manufacturing equipment Salary of supervisor of engine production Rental cost of equipment used to make engines Allocated portion of corporate-level facility-sustaining costa Total cost to make 14,900 angines $ 417,200 387,400 32.000 82,000 15.000 89,000 91.022.600 "The equipment has a book value of $104,000 but its market value is zero. Required a. Determine the maximum price per unit that Franklin would be willing to pay for the engines. b. Determine the maximum price per unit that Franklin would be willing to pay for the engines, if production increased to 18,400 units? (For all requirements, round your Intermediate calculations and final answers to 2 decimal places.) a. Maximum price per unit b. Maximum price per unit

Answer 1

Here the maximum price would be the relevant cost of producing the engines

depreciation and allocated cost are irrelevant as they will incur whether engine is purchased or made.

so they will be ignored in decision making.

		working
cost of material	$28
labor	$26
salary of supervisor	$5.50	[$82,000/14900]
rental cost of equipment	$1.01	[$15,000/14900units]
maximum price per unit	$60.51	[28+26+5.50+1.01]

2.maximum price per unit

		working
cost of material	$28
labor	$26
salary of supervisor	$4.46	[$82,000/18400]
rental cost of equipment	$0.82	[$15,000/18400units]
maximum price per unit	$59.28	[28+26+4.46+0.82]

as the number of unit increases the price per unit decreases as supervisor salary and rental on equipment is fixed cost.they remains constant in total.