Establishing price for an outsourcing decision
Green Lawn Inc. 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 (15,000 units x $21) |
$315,000 |
Labor (15,000 units x $26) |
390,000 |
Depreciation 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 |
41,500 |
Total cost to make 15,000 engines |
$896,500 |
Required
a. Determine the maximum price per unit that Green Lawn would be willing to pay for the engines.
b. Would the price computed in Requirement a change if production increased to 18,750 units? Support your answer with appropriate computations.