1-a. The Provincial Bus Company wishes to purchase 660 engines in October. The bus company is willing to pay a fixed fee of $600,000 and reimburse The Engine Guys for all manufacturing costs incurred to manufacture 660 motors. October is a busy month for The Engine Guys, and there are sufficient orders to operate at 100% capacity utilization. There will be no variable marketing costs on this government contract. Compute the incremental benefit of the contract.
1-b. Indicate whether the Provincial Bus Company’s contract should be accepted.
2-a. An outside contractor is willing to supply 2,500 engines at a price of $432 per unit. If the offer is accepted, the company will make 2,500 engines in-house and buy 2,500 engines from the contractor. The company’s fixed manufacturing costs will decline by 20% and the variable marketing costs per unit on the 2,500 engines purchased will decline by 40%. Calculate the cost in each option.
Purchase cost Variable manufacturing Fixed manufacturing Variable marketing Fixed marketingCost of option Difference in favour of make option