Florida Kitchens produces high-end cooking ranges. The costs to manufacture and market the ranges at the company’s volume of 3,000 units per quarter are shown in the following table: 

The company has the capacity to produce 3,000 units per quarter and always operates at full capacity. The ranges sell for $4,000 per unit. 

Required

a. Florida Kitchens receives a proposal from an outside contractor, Burns Electric, who will manufacture 1,200 of the 3,000 ranges per quarter and ship them directly to Florida’s customers as orders are received from the sales office at Florida. Florida would provide the materials for the ranges, but Burns would assemble, box, and ship the ranges. The variable manufacturing costs would be reduced by 40 percent for the 1,200 ranges assembled by Burns. Florida’s fixed nonmanufacturing costs would be unaffected, but its variable nonmanufacturing costs would be cut by 60 percent for these 1,200 units produced by Burns. The Florida plant would operate at 60 percent of its normal level, and total fixed manufacturing costs would be cut by 20 percent. What in-house unit cost should be compared with the quotation received from Burns Electric? Should the proposal be accepted for a price (that is, payment to the contractor) of $840 per unit?

b. Assume the same facts as in requirement (a) but assume that the idle facilities would be used to produce 320 specialty ranges per quarter. These ranges could be sold for $18,000 each, while the costs of production would be $12,650 per unit variable manufacturing cost. Variable marketing costs would be $400 per unit. Fixed nonmanufacturing and manufacturing costs would be unchanged whether the original 3,000 regular ranges were manufactured or the mix of 1,800 regular ranges plus 320 specialty ranges was produced. Considering this opportunity to use the freed-up space, what is the maximum purchase price per unit that Florida Kitchens should be willing to pay Burns Electric to assemble regular ranges? Should the Burns proposal of $840 per unit be accepted?

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Unit manufacturing costs Variable costs Fixed overhead... Total unit manufacturing costs Unit nonmanufacturing costs Variable..... Fixed.. Total unit nonmanufacturing costs. Total unit costs.... $1,440 720 $360 840 $2,160 1,200 $3,360