Super Motors produces electric motors for sump pumps. The company’s normal production volume is 2,000 motors per month. The maximum production capacity is 4,000 motors per month. The current selling price per motor is $630. The cost per unit of manufacturing and marketing the motors at the normal volume is as follows:
SUPER MOTORS
Cost per Unit for Sump Pump Motors
Manufacturing costs
Direct materials $ 80
Direct labour 100
Variable overhead 20
Fixed overhead 100 $300
Marketing costs
Variable $ 30
Fixed 70 100
Total unit cost $400
Required
Answer the following independent questions.
a. The Provincial Flood Relief Agency wishes to purchase 600 motors during the month of June. The agency is willing to pay a fixed fee of $240,000 and reimburse Super Motors for all manufacturing costs incurred on behalf of the agency in making the 600 motors. June is the busiest month for Super Motors and there are sufficient orders from customers to fully utilize the production capacity of 4,000 motors. There will be no variable marketing costs on the government contract. Indicate whether the agency’s contract should be accepted. Provide all supporting calculations.
b. An outside contractor is willing to supply 1,000 motors at a price of $300 per unit. If the offer is accepted, the company will make 1,000 motors in-house and buy 1,000 motors from the contractor. The company’s fixed manufacturing costs will decline by 30% and the variable marketing costs per unit on the 1,000 motors purchased will decline by 25%. Determine whether the contractor’s offer should be accepted. Provide all supporting calculations.