Petro Motors, Inc. (PMI), produces small gasoline-powered motors for use in lawn mowers. The company has been growing steadily over the past five years and is operating at full capacity. PMI recently completed the addition of new plant and equipment at a cost of $6,000,000, thereby increasing its manufacturing capacity to 108,000 motors annually. The addition to plant and equipment will be depreciated on a straight-line basis over 10 years.
Sales of motors were 75,000 units prior to the completion of the additional capacity. Cost records indicated that manufacturing costs had totaled $72 per motor, of which $64 per motor was considered to be variable manufacturing costs. PMI has used the volume of activity at full capacity as the basis for applying fixed manufacturing overhead. The normal selling price is $120 per motor, and PMI pays a 13% commission on the sale of its motors.
LawnPro.com offered to purchase 25,000 motors at a price of $72 per unit to test the viability of distributing lawn mower replacement motors through its website. PMI would be expected to produce the motors, store them in its warehouse, and ship individual motors to LawnPro.com customers. As orders are placed directly through the LawnPro.com website, they would be forwarded instantly to PMI. No commissions will be paid on this special sales order, and freight charges will be paid by the customer purchasing a motor.
a. Calculate the cost per motor, for cost accounting purposes, after completion of the additional plant capacity. (Do not round intermediate calculations.)
b. Identify all the relevant costs that PMI should consider in evaluating the special sales order from LawnPro.com. (Select all that apply.)
Variable manufacturing costs per motor.
Cost associated with storing the motors in the PMI Warehouse to await shipment.
Fixed costs.
Commissions and freight
c. Should the offer from LawnPro.com be accepted?
Yes
No