Reference no: EM132711665
Problem - Scoot Ltd manufactures motorised scooters. Currently, the company produces 5000 units. Scoot Ltd makes the motor for their motorised scooter range in batches of 500 units (i.e. 10 batches for 5000 units). The equipment used to make the motors is rented from Motor Mania. Inspection, set- up and materials-handling costs vary with the number of batches. The costs for making 5000 motors are as follows:
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Cost per unit
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Costs for 5000 units
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Direct materials
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$4.00
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$20,000
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Direct manufacturing labour
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2.00
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10,000
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Variable manufacturing overhead (utilities)
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1.50
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7,500
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Inspection, set-up, materials handling
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1,000
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Equipment rental
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1,500
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Allocated fixed costs of factory overhead
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15,000
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Total costs
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$55,000
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Motor Mania is offering to supply the motors required by Scoot Ltd at $8.20 each. Deciding to take up the Motor Mania offer will mean that Scoot Ltd has no need to rent the motor-making equipment.
If Scoot Ltd takes up Motor Mania's offer, the facility where the motors are currently manufactured will be idle. At the expected production and sales volume of 5000 units, calculate the total relevant costs of buying the motor from Motor Mania. On the basis of financial considerations alone, should Motor Mania's offer be accepted?
If Scoot Ltd takes up Motor Mania's offer, the facility where the motors are currently manufactured will be used to add a light and horn to the motorised scooter. This upgrade means that the scooters can be sold for an additional $20 premium. The variable cost per unit of the light and horn upgrade would be $18 and additional fixed costs of $8000 would be incurred. On the basis of financial considerations alone, should Scoot Ltd make or buy the motors, assuming that 5000 units are produced (and sold)? Show your calculations.
The sales manager is concerned that the estimate of 5000 units may be high and believes that only 3200 units will be sold. Production will be cut back, freeing up work space. This space can be used to add a light and horn whether Scoot Ltd buys the motors or makes them in-house. At this lower level of production and sales, Scoot Ltd will produce the motors in 8 batches of 400 units each. On the basis of financial considerations alone, should Scoot Ltd purchase the motors from the outside vendor? Show your calculations.
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