Question

Levesque 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 (20,000 Units x $26) Labor (20,000 Units X $20) 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 costs Total cost to make 20,000 engines $ 520,000 400,000 42,000 85,000 23,000 80,000 $1,150,000 * The equipment has a book value of $90,000 but its market value is zero. Required a. Determine the maximum price per unit that Levesque would be willing to pay for the engines. b. Determine the maximum price per unit that Levesque would be willing to pay for the engines, if production increased to 24,000 units. (For all requirements, Round your answers to 2 decimal places.) a. Maximum price per unit Maximum price per unit

Answer 1

maximum price per unit will be the relevant cost which would be affected if the engines are bought

	20000 units	24000 units
cost of material	520000	624000[24000*26]
labor	400000	480000[24000*20]
depreciation [sunk cost not relevant]	0	0
salary of supervisor	85000	85000
rental cost of equipment	23000	23000
allocated portion of equipment(irrelevant as they would occur in both the situation)	0	0
Total cost	1028000	1212000
unit	20000	24000
Maximum price per unit	51.40$	50.50$