Chapter 13, Problem 11E

Exercise 6-11A    Establishing price for an outsourcing decision

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 × $26)	$ 520,000
Labor (20,000 units × $20)	400,000
Depredation on manufacturing equipment*	42,000
Salary of supervisor of engine production	85,000
Rental cost of equipment used to make engines	23,000
Allocated portion of corporate-level facility-sustaining costs	80,000
Total cost to make 20,000 engines	$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.    Would the price computed in Requirement a change if production increased to 24,000 units? Support your answer with appropriate computations.