Probem
Reginald is the controller for Scoot Inc. Scoot makes mobility scooters for senior citizens who have difficulty walking. Scoot has always manufactured the motors for its scooters inhouse; however, the marketing manager of Moto Industries has offered to sell motors to Scoot for $420 each. At the current level of demand of 4,500 units, the cost to produce one motor is as follows:
Unit cost
Direct materials $130
Direct labour 140
Manufacturing overhead (60% fixed) 290
Total $560
Reginald has approached the company engineers with this proposal. They discussed the option of purchasing the motors from Moto and producing a new scooter called the Turbo X in the manufacturing space previously used to produce the motors. It is estimated that Scoot Inc. could sell 750 Turbo X scooters per year. The estimated costs to produce one unit of Turbo X are as follows:
Unit cost
Direct materials $1,000
Direct labour $780
Variable manufacturing costs $120
Additional fixed manufacturing costs $320
At what selling price for the Turbo X will Scoot be indifferent between continuing to manufacture the motors in-house and outsourcing the motors and manufacturing the Turbo X?