Question

U-RIDE, Inc. currently produces the electric engines that are used in golf carts made and sold by the Company. Electco has offered to sell the electric engines to U-RIDE at a price of 200 each. Current production information follows: Unit-level material and labor 175, Facility-level depreciation of manufacturing equipment 5,000 /month, Product-level engine production supervisor's salary 2,000 /month, Annual facility-level utilities 15,000. Buying the engines will free up manufacturing capacity that could be used to make a new economy line golf cart that would produce an additional 36,000 profit per year. U-RIDE is currently operating profitably producing and selling 2,000 engines annually. Based on this information, which of the following is true?

Answer 1

U-RIDE, Inc. should consider both the direct cost savings and the opportunity cost of using their manufacturing capacity for a new product line when deciding whether to buy electric engines from Electco or continue producing them in-house.

Step-by-step explanation:

U-RIDE, Inc. is evaluating whether they should produce their own electric engines for golf carts or purchase them from Electco for $200 each.

To make this decision, we need to consider not just the unit-level material and labor cost which is currently $175 but also the monthly fixed costs such as the facility-level depreciation of manufacturing equipment ($5,000/month), the engine production supervisor's salary ($2,000/month), and the annual facility-level utilities cost ($15,000). If U-RIDE stops producing the engines, they can use the freed-up manufacturing capacity to create a new economy line golf cart with an additional profit of $36,000 per year.

However, since they are selling 2,000 engines annually and operating profitably, the decision should incorporate a comprehensive calculation to determine if the foregone profit from engine sales outweighs the benefits of buying the engines and using the capacity for the new product line.