Yardguard Company manufactures and sells a variety of “home improvement” products.

One product, a lawn mower, is in such high demand that the company has operated both of the departments it uses to produce mowers at the departments’ maximum capacity for several years. The company expects to be able to sell all of the mowers it can produce for many years at $180 per mower. The major reason for the popularity of the Yardguard mower is its quiet and reliable engine. Engines are manufactured in Department A. Mower housing, engine mounting, and testing of the mowers take place in Department B. Yardguard uses activity-based costing to assign variable factory overhead to its products. Cost information relating to mower manufacturing in the two departments is as follows:

Department A Department B Expected production 25,000 engines 25,000 mowers Variable manufacturing costs per unit:

Direct materials $17 $21?

Direct labor 10 13 Variable factory overhead 2 16 Fixed factory overhead $24 per engine $ 8 per mower Selling and administrative costs Variable: $20 per mower sold Fixed: $300,000 Excluding engines

’Mowers go through three activity pools (purchase related, materials movement related, and inspection related) for the assignment of variable factory overhead in Department A. The rate per driver unit is $5 per purchase order, $3 per materials movement, and $2 per inspection. The average driver units per engine are 0.4 purchase orders, 1.0 materials movement, and 0.5 inspections.

Yardguard recently has been offered $75 per engine for 5,000 engines for the coming year and must decide whether or not to accept the offer. If the company accepts this offer, it will produce and sell only 20,000 mowers. In this case, the company’s total fixed factory overhead costs for each department will not change. The controller of Yardguard has asked you, a management accountant for the company, to prepare an analysis of this offer.

Required: (1) Write the controller a memo that recommends whether or not to accept the offer for 5,000 engines. Include in the memo

(a) a schedule of the pretax profit Yardguard would earn by not accepting the offer, and

(b) a schedule of the pretax profit Yardguard would earn by accepting the offer.

(2) What minimum price per engine would make the offer acceptable? LKY-1