Glbson 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 (14,700 Units x $17) Labor (14,700 Units x $17) 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 $ 249,900 249, 900 32,000 73,000 16,000 89,000 Total cost to make 14,700 engines $ 709,800 *The equipment has a book value of $97,000 but its market value is zero. JFZ Note: Is the Book Value of an asset (original cost - depreciation taken to date) ever relevant? No. Book value is the result of a decision made in the past (i.e. Sunk). Required a. Determine the maximum price per unit that Gibson would be willing to pay for the engines (.e. where the cost would be the same and management would be "indifferent" between making and buying on a guantitative basis). b. Determine the maximum price per unit that Gibson would be willing to pay for the engines, if production increased to 18,700 units (assuming the same indifference as defined in part "a"). (Zeigler Note: For all requirements, Round your answers to 2 decimal places.) a Maximum price per unit b. Maximum price per unit
Glbson 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 (14,700 Units x $17) Labor (14,700 Units x $17) 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 $ 249,900 249, 900 32,000 73,000 16,000 89,000 Total cost to make 14,700 engines $ 709,800 *The equipment has a book value of $97,000 but its market value is zero. JFZ Note: Is the Book Value of an asset (original cost - depreciation taken to date) ever relevant? No. Book value is the result of a decision made in the past (i.e. Sunk). Required a. Determine the maximum price per unit that Gibson would be willing to pay for the engines (.e. where the cost would be the same and management would be "indifferent" between making and buying on a guantitative basis). b. Determine the maximum price per unit that Gibson would be willing to pay for the engines, if production increased to 18,700 units (assuming the same indifference as defined in part "a"). (Zeigler Note: For all requirements, Round your answers to 2 decimal places.) a Maximum price per unit b. Maximum price per unit
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Gibson 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 (14,700 Units x $17)
Labor (14,700 Units x $17)
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
$ 249,900
249, 900
32,000
73,000
16,000
89,000
$ 709,800
Total cost to make 14,700 engines
*The equipment has a book value of $97,000 but its market value is zero. JFZ Note: Is the Book Value of an asset
(original cost - depreciation taken to date) ever relevant? No. Book vaiue is the result of a decision made in the past (I.e.
Sunk).
Required
a. Determine the maximum price per unit that Gibson would be willing to pay for the engines (.e. where the cost would
be the same and management would be "indifferent" between making and buying on a quantitative basis).
b. Determine the maximum price per unit that Gibson would be willing to pay for the engines, if production increased to
18,700 units (assuming the same indifference as defined in part "a").
(Zeigler Note: For all requirements, Round your answers to 2 decimal places.)
a Maximum price per unit
b. Maximum price per unit
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