The Engine Guys produces specialized engines for \"snow climber\" buses. The com

Question

The Engine Guys produces specialized engines for "snow climber" buses. The company's normal monthly production volume is 7,500 engines, whereas its monthly production capacity is 15,000 engines. The current selling price per engine is $1,150. The cost per unit of manufacturing and marketing the engines at the normal volume is as follows: Costs per Unit for Engines Manufacturing costs: Direct materials Direct labour Variable overhead Fixed overhead $102 184 184 501 31 Subtotal Marketing costs Variable Fixed $ 58 127 185 $ 686 Subtotal Total unit cost Required Answer the following independent questions 1-a. The Provincial Bus Company wishes to purchase 710 engines in October. The bus company is willing to pay a fixed fee of $900,000 and reimburse The Engine Guys for all manufacturing costs incurred to manufacture 710 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 government contract. Compute the incremental benefit of the contract. Incremental benefit of the contract 1-b. Indicate whether the Provincial Bus Company's contract should be accepted Yes 0

Explanation / Answer

1.a. Incremental benefit of the contract : $ 480,390.

Contribution margin per unit on regular orders = $ 1,150 - $ ( 102 + 184 + 31 + 58) = $ 775.

Incremental benefit = Fixed Fee + Fixed Manufacturing Costs - Lost Contribution Margin from Regular Orders = $ 900,000 + $ 184 x 710 - $ 775 x 710 = $ 1,030,640 - $ 550,250 = $ 480,390.

1-b. Yes.

2-a.

2-b. No.

Buy 3,750 units and Make 3,750 units Make 7,500 units Purchase Cost $ 2,070,000 NA Variable Manufacturing 1,188,750 2,377,500 Fixed Manufacturing 1,104,000 1,380,000 Variable Marketing 348,000 435,000 Fixed Marketing 952,500 952,500 Cost of Option $ 5,663,250 $ 5,145,000 Difference in favor of make option 518,250

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