Final answer:
After considering both variable costs and the fixed costs per unit, U-RIDE's total production cost per engine is approximately $224.40, which is higher than Electco's offer of $200 per engine. Thus, it may be more cost-effective for U-RIDE to purchase the engines from Electco.
Step-by-step explanation:
To analyze whether U-RIDE, Inc. should accept Electco's offer for purchasing electric engines at $200 each, we need to evaluate the current production costs. U-RIDE's current unit-level material and labor cost is $175 per engine. However, there are additional costs to consider, such as the monthly facility-level depreciation of manufacturing equipment ($5,000/month), the engine production supervisor's salary ($2,000/month), and annual utilities ($15,000). To make an accurate comparison, we'll have to look at these costs on a per-unit basis.
With U-RIDE producing 2,000 engines a year and operating at 90% capacity, the fixed costs per engine need to be apportioned accordingly. The monthly fixed costs (equipment depreciation and supervisor's salary) equates to $7,000 ($5,000 + $2,000), and if we add the annual utilities cost divided by 12 months, we get an additional $1,250 per month. So, the total monthly fixed costs are $8,250.
When producing 2,000 engines a year, the monthly production is approximately 167 engines (2,000/12 months). So, the fixed cost per engine is about $49.40 ($8,250 divided by 167 engines). Adding this to the variable cost ($175), the total production cost per engine is approximately $224.40. This is higher than Electco's offer of $200 per engine. In this scenario, it appears more cost-effective for U-RIDE to purchase the engines from Electco rather than produce them in-house, assuming the quality and other factors are comparable.